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S^econH (Cuttton 

Revised and Continued to tite Year igo2 



^ OFT'..- \ 



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Copyright, 1895, 1902 



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The first edition of this work was published seven years 
ago. The intervening time has brought changes in our 
financial legislation, but still greater ones in public opinion. 

The Civil War left us a legacy of monetary problems 
which might have received solution soon after the restora- 
tion of specie payments, had not the silver question been 
precipitated into the field of debate. At bottom this was a 
question whether gold or silver should be our standard of 
value, and until it was settled no question of lesser impor- 
tance could gain the public ear. The election of 1896 
settled it in favor of gold, — a fact attested in the gold 
standard act of March 14, 1900. This act is no longer 
called in question except by those who think that it falls 
somewhat short of its declared aims. Opposition to the 
principle embodied in it is no longer heard. 

There is now an opportunity to resume consideration of 
the unsettled monetary problems which the Civil War left. 
These relate to the paper currency issued by the government 
and by the national banks ; and they have already begun to 
excite discussion in Congress, in the press, and in the aca- 
demic halls of the country. The present seems, therefore, 
to be a fitting time to revise a book which was originally 
written to meet a popular demand for information on the 
money, question when the issues were somewhat different 
from those facing us now. When the author took up this task 
he found that something more than revision was required. 
While following the general historical plan of the first edition 

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and adopting its text in part, he has practically rewritten 
it, adding several new chapters, expunging controversial and 
other matter that has become obsolete, and bringing the 
whole down to date. It has been his aim to adapt it more 
particularly to the use of the class room. To this end he 
has added a brief recapitulation and a list of authorities to 
each chapter. He has also sought the advice of practical 
educators, and has been so fortunate as to obtain the help 
of Mr. Arthur M. Day, Instructor in Economics in Columbia 
University, who has kindly read all the proofs and has made 
innumerable suggestions for the betterment of the text and 
the arrangement of the matter. The author's indebtedness 
to Mr. Day is greater than can be expressed within the 
usual limits of a preface. His acknowledgments are due 
also to Prof. J. C. Schwab, of Yale University, for valuable 
advice and suggestion during the progress of the revision. 

H. W. 

New York, March, 1902. 

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Chapter I. Money a Commodity i 

Differenc ebetween Money and Promises to Pay. — Aristotle 
on the Origin of Money. — Various Kinds of Money. — Wam- 
pum and Beaver. — Disappearance of Wampum. — Tobacco 
Money in Virginia. — Rapid Decline in Price. — Tobacco Riots 
in 1683. — Tobacco Paper Currency. — Early Massachusetts 
Currency. — Early New York Money. — Rice Currency. — 
Early California Devices. — Private Coins and " Slugs." — 
General Principles. — The Value of Gold. — All Trade is Barter. 

— Portability. — Stability. — Uniformity. — Durability. — Divi- 
sibility. — Cognizability. — Gold not wholly Free from Varia- 
tions in Value. — A Standard of Deferred Payments. — Money 
a Product of Evolution. — Recapitulation. — Authorities. 

Chapter II. Coinage 16 

Principles of Coinage. — Subsidiary and Token Coins. — 
Shape of Coins. — Materials. — Weight Coins. — The Mone- 
tary Standard. — An "Ideal Dollar" Impossible. — Seignior- 
age. — Deposits of Gold Bullion. — Assaying. — Coining. — 
Private Coining Inadmissible. — The Mint Price of Gold. — A 
" Premium on Gold." -- Abrasion of Coin. — The Spanish Dollar. 

— Gresham*s Law. — Early Colonial Coins. — The Pine-Tree 
Shilling. — The Proclamation of Anne. — It is disregarded. — 
Money of Account. — Recapitulation. — Authorities. 

Chapter III. Legal Tender 30 

Roman Law of Tender. — Origin of Modern Law of Ten- 
der. — Our First Coinage Act. — Double'vLegal Tender. — Its 
Failure. — Our Second Coinage Act. — Silver Coins in the 

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United States prior to 1853. — Our Third Coinage Act. — 
Our Fourth Coinage Act. — The Trade Dollar. — Present 
Varieties of Legal Tender. — Recapitulation. — Authorities. 

Chapter IV. Gold as a Metal 41 

WheVe Gold is found. — Its Affinity for Quicksilver. — 
Placer Gold. — Methods of Collection. — Hydraulic Mining. 

— Quartz Crushing. — Chlorination. — The Cyanide Process. 

— Recapitulation. 

Chapter V. Gold Production 49 

First Half of the Nineteenth Century. — California and 
Australia. — The Comstock Lode. — South Africa. — The 
Klondike. — Cripple Creek, Colorado. — Second Half of the 
Century. — Effect of New Gold on Prices. — Its Modus 
Operandi. — Prospect of Continued Advance. — Recapitula- 
tion. — Authorities for Chapters IV and V. 

Chapter VI. The Gold Standard 60 

Market Values of the Precious Metals. — Experience of 
England. — Act of 1774. — A Tentative Step. — Gold Standard 
adopted. — The United States and £6rtugal. — Experience of 
Germany. — Act of 1871. — Act of 1873. — Treasury Order of 
1900. — Bimetallist Agitation Ineffectual. — French Monetary 
Law of 1803. — Did not keep the Market Ratio Steady. — 
Austria-Hungary. — Adopts the Gold Standard in 1892. — 
Her Modus Operandi. — British India. — Petition for the Gold 
Standard. — The Herschel Commission of 1893. — Fowler 
Committee of 1898. — Japan adopts the Gold Standard. — 
Her New Coinage Law. — Russia adopts the Gold Standard. 

— New Russian Coinage Law. — South America. — Recapitu- 
lation. — Authorities. 

Chapter VII. The Latin Monetary Union .... 78 

Drainage of Silver. — First Treaty of the Latin Union. — 
Early Mishaps. — Paris Conference of 1867. — Movements for 
the Gold Standard in France. — Belgium suspends Silver 
Coinage. — Increasing Difficulties. — France suspends Silver 

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Coinage. — More Confusion. — Redemption of Five-Franc 
Pieces. — Belgium withdraws and returns. — General Con- 
clusion. — Recapitulation. 

Chapter VIII. International Monetary Confer- 
ences 88 

Paris Conference of 1878. — Mr. Groesbeck*s Proposal. — 
Objections of European Delegates. — Position of France. 

— European Delegates pronounce against Bimetallism. — 
Adjournment. — Paris Conference of 1881. — Views of Mr. 
Cemuschi. — Mr. Broch. — The "Limping Standard." — 
British India. — Mr. Forssell. — Mr. Thurman. — Bank of 
England. — Conclusions of France and the United States. — 
Adjournment. — Brussels Conference of 1892. — Programme 
of the United States. — The Rothschild Plan. — Report on 
the Same. — Adverse Vote in Committee. — The Position of 
France. — Mr. Allison favors a Postponement. — Adjourn- 
ment. — The Wolcott Commission of 1897. — Its Failure. — 
Recapitulation. — Authorities. 


Chapter I. Colonial Bills of Credit 103 

First Bills of Credit. — Strife with the Mother Country. — 
And with the Colonial Governors. — Prohibitions by Parlia- 
ment. — Rhode Island an Awful Example. — Testimony of 
Thomas Paine. — Loans from the Treasury. — Other Pretexts 
for Bills of Credit. — False Reports. — Forcing Laws. — Usual 
Career of Bills of Credit. — Extending Time for Redemption. 

— Counterfeiting. — Depreciation. — Swindling. — Mob Law. 

— Repudiation. — Economic Effect of the Loan Bills. — A 
Conspiracy of Landowners. — Recapitulation. — Authorities. 

Chapter II. Revolutionary Bills of Credit . . .115 

Franklin's Warning. — First Issues. — Pelatiah Webster. — 
Early Depreciation. — Price Convention in New England. — 
Burglary legalized. — Price Convention of the Middle States. 

— Washington's First Views. — Subsequently changed. — 

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The Final Cat^ysm. — Social Terrorism. — Mutiny of Sol- 
diers. — " New Tenor." — Counterfeiting. — Specific Supplies. 
— A Complete Failure. -— Impressments. — Also a Failure. — 
Scales of Depreciation. — "Not Worth a Continental." — 
Continental Money considered as a Tax. — Or as Con- 
fiscation. — The Alternative. — Display of Luxury during 
the War. — Post-Revolutionary Bills. — Recapitulation. — 

Chapter III. The Greenbacks i^o 

Treasury Notes before the Civil War. — War Loans of 
1861. — Suspension of Specie Payments. — The Legal-Tender 
Bill. — Bankers remonstrate against it. — Mr. Chase assents 
to it. — The Bill passes. — The Second Issue. — The Coin 
Purchase Act. — Third Issue. — Depreciation. — Interest- 
Bearing Notes. — Compound-Interest Notes. — Fractional 
Currency. — The 10-40 Bonds. — Maturing Bonds paid in 
Gold. — Funding Clause repealed. — The Anti-Gold Law. — 
Its Repeal. — Were Legal-Tender Notes Necessary ? — Other 
Methods of War Financiering. — Effect of Legal Tender on 
Wages. — On Prices of Commodities. — First Trading in 
Gold. — Gold Exchange organized. — Gold Exchange Bank. 
— Gold Clearings. — A Commercial Necessity. — Gambling 
Raids. — " Selling Short." — Black Friday. — California 
adheres to the Gold Standard. — Early Embarrassments. — 
Severe Losses. — Confusion in Business. — Greenbacks not • 
Legal Tender for Taxes. — Rise of the Rate of Interest. — 
Specific Contract Law. — Sustained by the Supreme Court of 
the United States. — Supreme Court Decisions. — Gold Con- 
tracts Enforceable. — The Hepburn Case. — The Hepburn 
Judgment reversed. — Judge Strong on " Value." — The 
Latest Decision. — George Bancroft's Criticism. — Recapitu- 
lation. — Authorities. 

Chapter IV. Confederate Currency 164 

First Steps. — A Produce Loan. — The Currency not Legal 
Tender. — Failure to Tax. — Compulsory Funding. — Partial 
Repudiation. — Final Collapse. — Fatal Mistakes. — State 
and Private Currency. — Recapitulation. — Authorities. 

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Chapter V. After the War /. . 174 

Money as an Educator. — Paying Bonds with Greenbacks. 

— Policy of Contraction adopted. — Repealed. — Greenbacks 
reissued. — Inflation Bill of 1874. — Vetoed by President 
Grant. — Specie Resumption Act of 1875. — Doubts as to its 
Meaning. — Attempts to repeal it. — Political Campaign of 
1875. — Resumption accomplished. — Gold Imports in 1879 
and 1880. — The jJ5 100,000,000 Reserve. — The Sherman Act. 

— Silver and Tariff Bills in 1890. — The Treasury Deficit. — 
Gold Exports. — The Currency Act of 1900. — Treasury Divi- 
sions of Issue and Redemption. — The " Endless Chain." — 
Treasury Notes of 1890 to be retired. — Minor Provisions of 
the Act of 1900. — Denominations of Paper Currency. — 

Chapter VI. Silver Dollars and the PANicybF 1893 191 

First Silver Agitation. — The "Crime of 1873." — Move- 
ment for Rerrionetization. — New Alignment of Parties. — 
The Bland Bill. — The A llisoI^' Amendment. — Vetoed and 
passed. — Modus operandi. — Slow Circulation of the New 
Dollars. ^ Rapid Movement in 1879 and 1880. — Crisis in 
1884. — Small Silver Certificates introduced. — Panic pre- 
dicted. — The Act of 1890. — Gold Movements of 1891 and 
1892. — Action of Secretary Foster. — Panic of 1893. — Com- 
mercial Crises. — Causes of the Panic. — End of Silver Pur- 
chasing. — " Coining the Seigniorage." — Indifference of 
Congress. — Bond Sales in 1894. — Bond Syndicate of 1895. — 
Panic of 1895. — ^100,000,000 Bond Sale. — Coinage of the 
Silver Bullion in the Treasury. — Act of 1900. — Its Defect. 

— Direct Redemption of the Silver Dollar Desirable. — 
Recapitulation. — Authorities for Chapters V and VI. 


Chapter I. Functions of a Bank 217 

Original Meaning of the Term. — A Manufactory of Credit. 

— Discounting Commercial Paper. — Two Kinds of Deposits. 

— Utility of Bank Credits. — Limit to Bank Credits. — Bank 

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Reserves. — Bank Notes. — Of the Same Nature as Checks. 

— Issue of Notes Automatic. — Utility of Bank Notes. — 
Evolution of Bank Notes. — A Common-Law Right. — Why 
Interest is paid for the Use of Bank Notes. — How Banks aid 
in the Work of Production. — Recapitulation. — Authorities. 

Chapter II. A Bank Statement 229 

Loans and Discounts. — Accommodation Paper. — "Cash 
Credits." — Drafts and Bills of Exchange. — Acceptances. — 
Bills of Lading. — Letters of Credit. — United States Bonds. 

— Other Interest-Bearing Securities. — Real Estate. — Due 
from Other Banks. — National Bank Notes. — The Cash 
Reserve. — Bank Note Redemption Fund. — Country Bank 
Deposits. — Interest on Deposits. — Certificates of Deposit. 

— Certified Checks. — Cashier's Checks. — Capital and 
Surplus. — Profits. — Recapitulation. 

Chapter III. The Clearing-House System . . . 240 

The Essence of Clearing. — The Old System. — New York 
Clearing House. — Preparations for Clearing. — The Opera- 
tion. — The Result. — Present System of Payment. — 
Magnitude of Clearings. — Other Varieties of Clearing. — 
Clearing-House Loan Certificates. — " Pooling " the Reserves. 

— Form of Certificates. — Effect on the Public Mind. — The 
Case of a Small Town. — That of a Large City. — Suspen- 
sion not always prevented. — Benefit of the System. — Small 
Certificates for Retail Trade. — Recapitulation. — Authorities. 

Chapter IV. Colonial Banking 256 

Colonial Ideas of Banking. — The Bank of Amsterdam. — 
The Fallacy^ of Land Banking. — The Massachusetts "Pro- 
jection" of 17 14. — Crude Conceptions. — Attorney-General 
Dudley attacks the Scheme. — The New London Bank of 
^73^' — The Company suppressed. — Private Note issues 
in 1731. — A New Hampshire Experiment. — The Massa- 
' chusetts Land Bank of 1740. — Its Note Issue. — Opposition 
of Governor Belcher. — Political Consequences. — Parlia- 
ment takes Action. — Mob Violence. — Recapitulation. — 

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Chapter V. Early American Banks 268 

Bank of North America. — Chartered by Congress in 1781. 
Its Service in the Revolution. — Rechartered by Pennsyl- 
vania. — Attacks on the Bank after the War. — The 
Charter repealed. — And reenacted. — Bank of Massachu- 
setts. — First Legal Restrictions. — Bank of New York. 

— At First Unpopular. — Legal Restrictions. — Question 
of Small Notes. — Restriction of Debts and Credits. — 
Other Prohibitions and Restrictions. — Recapitulation. — 

Chapter VL First Bank of the United States . 278 

Hamilton's Report. — The Bank's Capital. — Regulations 
of its Charter. — Constitutionality of the Bill. — Reasons for 
Regulations. — The Government as a Shareholder. — Voting 
Power of Shareholders. — Other Provisions. — Great Finan- 
cial Success. — A Regulator of the Currency. — Renewal of 
Charter proposed. — The Spoils System. — Opposition to the 
New Charter. — Alleged Foreign Influence. — The Govern- 
ment's Shares in the Bank. — Senatorial Debate. — Charter 
refused. — Mr. Gallatin's Opinion. — Recapitulation. — 

Chapter VII. Second Bank of the United States . 291 

Financial Distress in 18 14. — A National Bank proposed. 

— The Bank Charter of 1816. — Public Deposits. — Other 
Regulations. — Deposits payable in Specie. — Duties and 
Taxes. — Post Notes. — Branch Drafts. — Penalty for Suspen- 
sion. — Bonus for Charter. — Branch Banks. — Scandalous 
Beginnings. — The Bank in 1829. — Recapitulation. 

(Chapter VI I L The Bank War 300 

The Question of a Recharter. — First Signs of Political 
Conflict. — Isaac Hill. — Amos Kendall. — Jackson's First 
Message. — Its Misstatements. — Benefits of the Bank. — 
Bank sustained by Congress. — The Previous System. — 
Biddle and Ingham. — Jackson's Message of 1830. — Milder 
Tone of the President. — Henry Clay and the Bank. — 

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Baltimore Platform of 1831. — Affair of the 3 Per Cents. — 
Mr. Biddle's Duplicity. — The Charter passed. — The Charter 
vetoed. — Jackson's Victory. — The Deposits removed. — 
The Pennsylvania Charter. — Wild Speculation. — Final 
Collapse of the Bank. — Recapitulation. — Authorities for 
Chapters VII and VIII. 

Chapter IX. The Suffolk Bank System . . . .315 

Stock Notes. — Struggle to compel Payment of Capital 
Stock. — Chaos of Banking in New England. — The New 
England Bank. — The Suffolk Bank. — Country Banks asked 
to redeem in Boston. — The Forcing Process. — Basis of the 
Suffolk System. — Its Popularity and Success. — Small 
Losses. — The " Banking Principle." — The " Currency Prin- 
ciple." — Specie Reserve. — Massachusetts General Laws. — 
Recapitulation. — Authorities. 

Chapter X. The Safety Fund System 327 

Banks and Politics. — The Manhattan Company. — Joshua 
Forman. — Safety Fund System. — Notes made a Prior Lien. 

— Reason for this. — Fraudulent Overissues. — Faults of the 
System. — The Safety Fund in Canada. — Recapitulation. 

Chapter XI. The Free Bank System ...... 335 

The Evils of Monopoly. — Political Revolt. — Free Banking 
Law. — A Bad Beginning. — Abuses of Free Banking. — 
Faults of the System. — System perfected. — Elasticity of 
Note Issues. — Free Banks in Illinois. — Final Collapse. — 
Indiana. — Wisconsin. — Free Banking in Canada. — Reca- 
pitulation. — Authorities for Chapters X and XI. 

Chapter XII. Chaos of Banking in the XIX Cen- 
tury 346 

Speculation in Bank Charters. — Bank Failures. — 
Chaos in North Carolina. — In Georgia. — In Michigan. — 
"Wild-Cat Banks." — Counterfeit and Spurious Notes. 

— Counterfeit Detectors. — Minor Abuses. — Recapitulation. 

— Authorities. 

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Chapter XIII. Some Notable Banks 357 

State Bank of Indiana. — Its Branch System. — Charter 
Regulations. — Circulating Notes. — The System of Exami- 
nations. — Final Liquidation. — Crisis of 1857. — Mortgage 
Loans. — George Smith. — The Wisconsin Marine and Fire 
Insurance Co. — Efforts to suppress Smith. — " George 
Smith's Money."-— The " Raison d'etre." — Smith's Retire- 
ment. — Louisiana Bank Act of 1842. — Recapitulation. — 

Chapter XIV. The National Bank System . . . 372 

Origin of the System. — Difficulty of passing the Bill. — 
Comptroller. — Organization. — Capital Stock. — Powers. — 
Deposit of Bonds. — Directors. — Liability of Shareholders. 

— Circulating Notes. — Their Redemption. — Retirement of 
Circulation. — Redemption of Failed Bank Notes. — Tax on 
Circulation. — Legal Reserve. — Usury. — Restrictions. — 
Reports. — State Taxation. — Bank Examiners. — Receivers. 

— Public Deposits. — Recapitulation. 

Chapter XV. Foreign Banking Systems 385 

The Bank of England 

Successful Beginning. — Monopoly of Note Issues. — The 
" Restriction" of 1797. — Sir Robert Peel. — The Act of 1844. 

— Suspension of the Bank Act. — The Arguments Pro and 
Con. — The Bank keeps the Gold Reserve of the Nation. 

The Scotch Bank System 

Cash Credits. — The Branch System. — Note Issues. — 
Economy in the Use of Gold. 

The Canadian Bank System 

Note Issues. — Safety Fund. — Branch Banks. — Bank 
Note Inspection. 

The Bank of France 

Note Issues. — Cash Reserves. — Suspension of Specie 
Payments. — Branches and Discounts. — Great Service to 
the Government. 

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The Imperial Bank of GermaKy 

Its Organization. — Note Issues. — The Elastic Feature. 

— Various Provisions. — Dividends. — Recapitulation. — 

Chapter XVI. Present Problems 417 

Inflexibility of Note Issues. — Seasonal Demands for 
Notes. — Shrinkage of Circulation. — The Premium on Bonds. 

— Branch Banks. — Their Relation to Note Issues. — Minor 
Advantages. — Extinction of the Debt. — A Central Bank. — 
Economy of Cash Reserves. — Legal Cash Reserve. — Bank 
Notes as Reserves. — The Indianapolis Plan. — The Guaranty 
Fund. — Government Responsibility. 

Chapter XVII. Conclusion 432 

Gold Certificates. — Legal-Tender Notes. — Silver Dollars. 

— Bank Notes. — Example of the Suffolk Bank System. — 
The Indianapolis Plan. — Branch Bankii\g. — The Treasury 
Surplus. — Principles of a Sound Currency. 

Appendix A. President Grant's Veto of the Infla- 
tion Bill 439 

Appendix B. The Indianapolis Monetary Commis- 
sion 442 

Appendix C. The Fowler Bill 453 

i^ppENDix D. Canadian Branch Banks 457 

Bibliography 461 

Index 469 

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Money is a commodity which mankind voluntarily accepts 
in exchan^ for all other commodities and services. 

We are now speaking of real money ^ not of promises topny 
money. All of our paper circulating medium and all of our 
Difference be- Smaller coins are, either directly or indirectly, 
tween Money and promises to pay money. In the case of the 
Promises to pay. ^^^^^^ ^^^ promise is stamped on it. In 

the case of the latter it is merely expressed in the laws. 
Thedifference between real money and a promise to ^>ay 
money is the same as that between a meal and a meal ticket, 
or betweeiTaltrinik anji autaink check. 

A~cbmmodity which is universally accepted as a medium 
of exchange naturally becomes a standard of value^ by 
being continually brought into comparison with other com- 

Aristotle gives us the following definition of money and 
account of its origin : 

It is plain that in the first society (that is, in the household) 
there was no such thing as barter, but that it took place when the 


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community became enlarged : for the former had all things in 
common, while the latter, being separated, must exchange with 

each other according to their needs, just as many 
Aristotle ^ the barbarous tribes now subsist by barter ; for these 

merely exchange one useful thing for another, 
as, for example, giving and receiving wine for grain and other 
things in like manner. This kind of trading is not contrary to 
nature, nor does it resemble a gainful occupation, being merely 
the complement of one's natural independence. From this, never- 
theless, it came about logically that as the machinery for bringing^ 
in what was wanted, and of sending out a surplus, was inconven- 
ient, the use of money was devised as a matter of necessity. For 
not all the necessaries of life are easy of carriage ; wherefore, to 
effect their exchanges, men contrived something to give and take 
among themselves, which, being valuable in itself, had the advan- 
tage of being easily passed from hand to hand for the needs of 
life — such as iron or silver or something else of that kind, of which 
they first determined merely the size and weight, but eventually 
put a stamp on it in order to save the trouble of weighing, for the 
stamp was placed there as the sign of its value.^ 

Among the things used as money by various people 
within the historical period are cacao beans, salt, silk, 
furs, tobacco, dried fish, wheat, rice, olive oil, 
^*Mone^"^^^ cocoanut oil, cotton cloth, cowry shells, iron, 
copper, platinum, nickel, silver, and gold. It 
would be difficult to say what had not been used as money 
at some time or place. Our own history furnishes an abun- 
dance of curious examples, the most instructive being the 
tobacco currency of the colonial period. It may be said 
that Virginia grew her own money for nearly two centuries, 
and Maryland for a century and a half. 

The first settlers of New England found wampumpeage, 
sometimes called wampum and sometimes peage, in use 
among the aborigines as an article of adornment and a 
medium of exchange. It consisted of beads made from 

^ Politics^ I, 9. 

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the inner w horls of certain shells found in sea water. The 
beads were polished and strung together in belts or sashes. 
They were of two colors, black and white, 
B^ver^"* the black being double the value of the 
white. The early settlers of New England, 
finding that the fur trade with the Indians could be carried 
on with wampum, easily fell into the habit of using it as 
money. It was practically redeemable in beaver skins, 
which were in constant demand in Europe. The unit of 
wampum money was the fathom, consisting of 360 white 
beads worth sixty pence the fathom. In 1648 Connecticut 
decreed that wampum should be " strung suitably and not 
small and great vncomely and disorderly mixt as formerly it 
hath been." Four white beads passed as the equivalent of 
a penny in Connecticut, although six were usually required 
in Massachusetts and sometimes eight. In the latter colony 
wampum was at first made legally receivable for debts to 
the amount of 12//. only. In 1641 the limit was raised 
to ;^io, but only for two years. It was then reduced to 
40^-. It was not receivable for taxes in Massachusetts. 
The use of wampum money extended southward as far as 

The decline of the beaver trade brought wampum money 
into disrepute. When it ceased to be exchangeable in large 
sums for an article of international trade the basis of its 
value was gone. Moreover it was extensively counterfeited, 
and the white beads were turned into the 
of wamp^^^ more valuable black ones by dyeing. Never- 
theless it lingered in the currency of the 
colonies as small change till the early years of the eighteenth 
century. While it was in use it fluctuated greatly in value. 
The first General Assembly of Virginia met at James- 
town July 31, 16 19, and the first law passed was one fixing 
the price of tobacco " at three shillings the beste, and the 

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second sorte at i8//. the pounde." Tobacco was already 

the local currency. In 1642 an act was 

f^^YhziBiA^^^ passed forbidding the making of contracts 

payable in money, thus virtually making 

tobacco the sole currency.^ 

The act of 1642 was repealed in 1656, but nearly all the 
trading in the province continued to be done with tobacco 
as the medium of exchange. 

In 1628 the price of tobacco in silver had been 3^". 6d, 
per pound in Virginia. The cultivation increased so rap- 
idly that in 1631 the price had fallen to 6//. 
?*^^^®^^°® In order to raise the price, steps were taken 
to restrict the amount grown and to improve 
the quality. The right to cultivate tobacco was restricted 
to 1500 plants per poll. Carpenters and other mechanics 
were not allowed to plant tobacco " or do any other work 
in the ground.'* These measures were ineffective. The 
price continued to fall. In 1639 it was only 3^. It was 
now enacted that half of the good and all of the bad should 
be destroyed, and that thereafter all creditors should accept 
40 lb. for 100 ; that the crop of 1640 should not be sold for 
less than 12//., nor that in 1641 for less than 2s, per pound, 
under penalty of forfeiture of the whole crop. This law 
was ineffectual, as the previous ones had been, but it caused 
much injustice between debtors and creditors by impairing 
the obligation of existing contracts. In 1645 tobacco was 
worth only i^d, and in 1665 only id. per pound. 

These events teach us that a commodity which is liable 
to great and sudden changes of supply is not a desirable 
one to be used as money. 

In the year 1666 a treaty was negotiated and ratified 
between the colonies of Maryland, Virginia, and Carolina, 
to stop planting tobacco for one year in order to raise the 

1 Hening, I, 262. 

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price. This temporary suspension of planting made neces- 
sary some other mode of paying debts. It was accordingly 
enacted that both public dues and private debts falling due 
" in the vacant year from planting " might be paid in country 
produce at specified rates. 

In 1683 an extraordinary series of occurrences grew 

out of the low price of tobacco. Many people signed 

petitions for a cessation of planting for one 

Toba^o, Riots y^^j. f^^ ^^^ p^^^g^ ^f increasing the price. 

As the request was not granted, they banded 
themselves together and went through the country destroy- 
ing tobacco plants wherever found. The evil reached such 
proportions that in April, 1684, the Assembly passed a law 
declaring that these malefactors had passed beyond the 
bounds of riot, and that their aim was the subversion of 
the government. It was enacted that if any persons, to 
the number of eight or more, should go about destroying 
tobacco plants, they should be adjudged traitors and suffer 

In 1727 tobacco notes were legalized. These were in 
the nature of certificates of deposit in government ware- 
houses issued by official inspectors. They 
Cv^^^^^^ were declared by law current and payable 
for all tobacco debts within the warehouse 
district where they were issued. They supply an early 
example of the distinction between money on the one hand, 
and government notes, or bank notes, on the other. The 
tobacco in the warehouses was the real medium of ex- 
change. The tobacco notes were orders payable to bearer, 
for the delivery of this money. They were redeemable 
in tobacco of a particular grade, but not in any specified 
lots. Counterfeiting the notes was made a felony. In 1734 
another variety of currency, called " crop notes," was intro- 
duced. These were issued for particular casks of tobacco. 

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each cask being branded and the marks specified on the 

The circulating medium of the New England colonies was 
quite as fantastic as that of Virginia. Merchantable beaver 
g^^. was legally receivable for debts at los. per 

Massachusetts pound. In 1 63 1 the General Court of Massa- 
Currency. chusetts ordered that corn should pass for 

payment of all debts at the price it was usually sold for, 
unless money or beaver skins were expressly stipulated. In 
other words, a debt payable in pounds, shillings, and pence 
might be paid at the debtor's option in any one of three . 
ways : in corn at the market price, in beaver at 10s. per 
pound, or in the metalltc money of England. For more 
than half a century this order continued in force and oper- 
ation, other things being added to the list from time to time. 

In 1635 inusket balls were made receivable to the extent 
of 12//. in one payment. 

In 1640 Indian corn was made current at 4^". per bushel, 
wheat at 6^"., rye and barley at 5^"., and peas at 6^*. Dried 
fish was added to the list. Taxes might be paid in these 
articles and also in cattle, the latter to be appraised. 

The need of metallic currency was severely felt. In 1654 
it was ordered that no coin should be exported, except 20^-. 
to pay each one's traveling expenses, on penalty of for- 
feiture of the offender's whole estate. 

The cost of carrying the country produce taken for taxes 
amounted to 10 per cent of the collections. A constable 
once collected 130 bushels of peas as taxes in Springfield. 
He found that he could transport this portion of the public 
revenue most cheaply by boat. Launching it on the Con- 
necticut River, he shipped so much water on board at the 
falls that the peas were all spoiled. Thus we learn that 
money ought to be easy of carriage and not liable to injury 
by exposure to the elements. 

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In 1670 it was ordered for the first time that contracts 
made in silver should be paid in silver. 

In 1675, during King Philip's war, the need of metallic 
money for public use was so great that a deduction of 50 
per cent was offered on all taxes so paid. 

The first local currency of New Netherland was wampum, 

but it was subordinate to the silver coinage of the mother 

country ; that is, it was reckoned in terms of that coinage as 

fixed by the Dutch West India Company from 

Bajty Hew York ^^^^ ^^ ^^^^ j^ ^^^ ^^^^ ^^^ ^^ ^^ ^j^j^^ 

beads for a stiver. Wampum was not made 

in the province, but was imported from the east end of Long 

Island, the principal seat of production. It is mentioned in 

a letter from the Patroons of New Netherlands to the States 

General in June, 1634, as "being in a manner the currency 

of the country with which the produce of the country is 

paid for," the produce of the country being furs. 

Beaver soon became current here, as in New England, 
and for the same reason, its currency value being fixed by 
the company at 8 florins per skin. As 6 wampum beads 
were equal to i stiver and 20 stivers to i florin, and 8 
florins to i skin, the ratio of wampum to beaver was 960 
to I. The market ratio did not coincide with the legal 
ratio very long. Nor was the legal ratio of either wampum 
or beaver to silver maintained ; for, in 1656, Director Stuy- 
vesant wrote to the company urging that beaver be rated 
at 6 florins instead of 8, and wampum at 8 for a stiver 
instead of 6, as these rates were nearer the commercial 

In 1 7 19 the Assembly of South Carolina made rice 

receivable for taxes, " to be delivered in good barrels upon 

the bay in Charlestown." In the following 
Rice Currency. ^ r lu r • 1 • j 

year a tax of 1,200,000 lb. of rice was levied, 

and commissioners were appointed to issue rice orders to 

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public creditors, in anticipation of collection, at the rate of 
30^". per 100 lb., in the following form : 

" This order entitles the bearer to one hundred weight of 
well-cleaned merchantable rice to be paid to the commis- 
sioners that receive the tax on the second Tuesday in 
March, 1723." 

Rice orders were made receivable for all purposes, and 
counterfeiting was made felony without benefit of clergy. 

In eastern Tennessee and Kentucky, early in the nine- 
teenth century, deer skins and raccoon skins were receivable 
for taxes and served the purposes of currency. 

When California was first invaded by gold seekers there 
were a few Mexican coins in circulation there, not nearly 
sufficient to answer the needs of the growing community. 
The immigrants brought more or less metallic money with 
them. The smaller coins were those of many 
D^Xs*^*''™'* different countries, chiefly Spanish. For want 
of sufficient coins, the first trading was done 
largely with gold dust, sometimes by weighing it in scales, 
sometimes by guesswork. A "pinch" of gold dust about 
as large as a pinch of snuff had a current value and was a 
common measure in places where there was no means of 
weighing. At a public meeting in San Francisco, Septem- 
ber 9, 1848, it was resolved by unanimous vote that $16 
per ounce was a fair price for placer gold. This rate was 
at once adopted in all business transactions. By and by pri- 
vate coiners of gold came into the field. The Legislature 
was at first alarmed by the appearance of these unaccus- 
tomed pieces, and passed a law to prohibit their circulation 
and to close the shops where they were made. It was soon 
found, however, that they were a great convenience. Then 
the law was repealed. Several establishments immediately 
went to work assaying and coining gold. One of these 
was at Salt Lake City, whose productions were known as 

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Mormon coins. Only one of these establishments, that of 
Moffat & Co., of San Francisco, conformed exactly to the 
government standard of weight and fineness. All the 
others, however, including the Mormon ones, 
MkT^^siuS^** circulated freely, and were received on deposit 
by the banking houses until the government 
set up an assay office and began to stamp octagonal pieces of 
$50, called "slugs," and afterwards those of $20 each. This 
was done in 185 1 ; the San Francisco mint was not ready 
till 1854. The Moffat coins continued to circulate after the 
mint had gone into operation, since everybody had confi- 
dence in their goodness. It is estimated that $50,000,000 
of private coins were struck. They were received in the 
Atlantic cities at their assay value only. 

The foregoing illustrations drawn from our own history 
serve to explain the nature of money and the processes by 
which mankind learns to distinguish between 
^^chies good money and bad. Men discover the 

need of a common medium of exchange as 
soon as society emerges from the patriarchal state, where 
each group of persons is sufficient unto itself. They learn 
by experience that one who wants wheat, and has only skins 
to exchange for it, must meet somebody who has wheat and 
wants skins, and that much time and labor may be lost 
before the two can find each other. Then more time may 
be lost before they can agree upon the ratio at which the 
two articles should be exchanged for each other. The few 
and simple words with which Aristotle has treated this 
subject cannot be bettered. Whole tomes have been 
written to. say the same things and have ended without 
saying them. 

Money is always the product of labor. Nobody would 
give that which has cost him labor, in exchange for some- 
thing which he could obtain without labor. 

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All the things that have been used as money have pos- 
sessed value for other purposes, and this other value led to 
their use as money. Hence it may be said that the value 
of any standard money depends upon its utility for this and 

other purposes combined and is measured 
of*Goid^"* by the demand for those purposes. Gold 

would never have been brought into use as 
money if it had not possessed certain qualities of beauty, 
portability, durability, etc., which caused it to be prized as 
an article of adornment. 

All trade is barter, or the exchange of property and ser- 
vice for other property and service. This is true when wheat 
is exchanged for gold, and gold for cloth. Here are two 
acts of barter to accomplish one result, namely, the procur- 
ing of cloth for wheat. The word "barter" is commonly 
used to signify the exchange of property without the use 

of money. It must be borne in mind, how- 

B^rtw*^* " ^^^^^ ^^^^ ^^^ ^^^^^ ^^ barter, even when the 

precious metals are employed as intermediaries 

— the latter being articles of barter also, and possessing 

the same value as the things for which they are exchanged. 

TAe whole science of money hinges on this fact. 

Objections to tobacco money in Virginia and to the 

variegated colonial currency of New England are obvious. 

They were inconvenient in every way. In 
Portability. , V- , , -i ,, 

the first place, they were not easily portable. 

It cost ;^3 6^". in 1662 for cartage of the proceeds of the 

tax levy of the town of Ipswich, amounting to £']o ds, 2>d, 

In Virginia there was a difference in the value of tobacco 

notes according to the location of the warehouse where 

the tobacco was situated. This amounted in some cases 

to \os, per cwt. 

Another objection is found in the fluctuations in value of 

these currencies. The range of tobacco prices in Virginia 

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from 1619 to 1775 was from 3X. dd, down" to \d, per 

pound. We have seen what strenuous efforts were made 

by the tobacco-planting colonies to restrict the 

production and what distress and disorder 

were caused by their inability to do so. 

Another inconvenience attending these media of exchange 

was the difference in value between different lots of the 

same article at the same place. Tobacco, even when up to 

standard, was of four different kinds, described in the laws 

as sweet-scented, Oronoko, leaf, and stemmed. 


Then there were differences in the inspection, 
some inspectors being more skillful and more strict than 
others, whereby their receipts or notes came to have a higher 
price than others. There were differences also arising from 
different seasons and different cultivators. A large part of 
the legislation of both Virginia and Maryland was directed 
to the suppression of "trash." No substance can be con- 
sidered suitable for the purposes of money, if different 
parcels of it are of different degrees of goodness. 

Want of durability was another objection to all of thebe 

things. There was so much shrinkage and 

Durability. . . . 

deterioration in tobacco that the notes issued 

against it could not be safely kept more than one year. 

Some of the articles used as money in the colonial period 

could be divided and subdivided without 
Divisibility. , . r 1 • 1 , -i t 

losmg any part of their value, while others 

could not. Grain and tobacco could be so divided. Beaver 

skins could not For the purposes of exactitude divisibility 

is necessary. No article which does not possess this quality 

can be considered a good medium of exchange. 

It is not absolutely necessary that the substance used as 

money should be coined. Gold and silver were used as 

money before they were coined — and then they passed by 

weight. All that coining does is to save the trouble of 

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frequent weighing and assaying. Accordingly it is desirable 

that the substance of which money is composed should 

be one which can receive and retain a stamp. None of 

the substances which the early American 
Cognizability. , . , • ,- r i 

colonies used m lieu of the precious metals 

answered this requirement. The putting of wampum shells 
together in parcels equal to one penny, and higher denom- 
inations, easily recognized, was something akin to coinage. 
So also was the marking of a hogshead of tobacco by an 
inspector. When so marked it would pass without reweigh- 
ing or reexamination. The stamp had here become the 
sign of value, but the tobacco itself could not be stamped 
because the substance was not suitable for receiving and 
retaining an impression. 

All writers are agreed that the six requisites mentioned 
above are essential to a good kind of money, viz., portability, 
uniformity, durability, divisibility, cognizability, and stability 
of value. 

Long experience has taught mankind that these qualities 
are best embodied in the metal gold. 

It must not be assumed that gold is absolutely stable in 

value. When we speak of the value of one thing which 

measures all values, we mean its purchasing 

Gold not wholly power in terms of those commodities whose 
Free from Van- . . ,. . , i, , , ;' 

ations in Value, supply IS unlimited, or not controlled by 

monopoly. The value of gold thus measured 

is subject to variations, but it is impossible to measure 

them with accuracy, even when we compare prices during 

long intervals of time. We are concerned at present only 

with the comparative steadiness of value of different things, 

as, for example, gold and tobacco. If gold is subject to fewer 

changes of purchasing power than tobacco, it is better fitted 

to serve the purposes of money and will sooner or later 

supplant it in that function. If it is subject to fewer changes 

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than any other known substance, it will supersede all others. 
The fact that it is not wholly free from variation itself will 
not prevent it from becoming the sole and universal money 
of civilized mankind. 

The durability of gold is one of the most potent factors 
contributing to its stability of value. Gold does not deterio- 
rate with age, and its loss by abrasion is slight. The pro- 
duction of each year is added to the accumulations of the 
past. Hence the mass in existence at any time is so great 
that its value is not perceptibly affected by any change in 
the output of a single year or short series of years. This 
A standard mass may be likened to the ballast which gives 

of Deferred ^ Steadiness to a ship. Gold thus becomes a 
ajincnto-.' good standard of deferred payments. The 

desideratum here is that the value of the future payment 
shall be as nearly as possible equal to that of a present 
payment, although absolute equality cannot be expected. 

The durability of gold makes it also a convenient store of 
value. Gold coins or ornaments that have been buried 
thousands of years are of no less value than gold fresh from 
the mine. 

Money is a product of evolution, a result of the ages. 
The better has gradually crowded the worse out of existence. 
Our own history forms no exception to this 
of^Evoitttion*'*^* ^"^^» ^^"^ although our colonial ancestors for a 
time went back to a system almost as rude as 
that of the Homeric period, they eventually abandoned it 
and resumed metallic money, which always served as a 
mental standard even when it was not a legal one. It 
is a fact of prime importance — we meet it everywhere 
in colonial history — that in all trading, whether the 
medium of exchange was wampum, beaver, tobacco, or 
what not, there was a mental reference to metallic money, 
most commonly silver. In other words, silver, although 

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a latent standard, was the real standard at all times and 

The question may be asked, Why did our ancestors endure 
the burden of an inferior kind of money so long, when they 
knew that it was inferior? The answer is that a metallic 
money is an expensive tool acquired by a community at a 
considerable cost and sacrifice. The early settlers had very 
little capital, and preferred to put as little 'of it as possible 
into the shape of money, and as much as possible into food, 
clothing, and implements. They could not have both a 
metallic currency and an axe. They chose the axe as being 
more important to them, and got along without the coin. 
Hence the prevalence of paper money. Moreover, the one 
form of ready capital which was acceptable to all, and there- 
fore could be used as a medium of exchange, was a ready 
article of export, e.g,^ in New York, beaver skins ; in Vir- 
ginia, tobacco; in South Carolina, rice, etc. These were 
the natural money in those sections. Silver could not be 
kept in circulation, as it was inevitably exported to be ex- 
changed - for more valuable kinds of capital (axe, food, 
clothing). The faster it was coined or imported from the 
West Indies, the faster it left to buy goods abroad. 


Money " is a common measure of value, a medium of 
exchange, and a standard of deferred payments. Like most 
other commodities, it is the product of labor. Any portable 
article may answer the purpose of money; some com- 
modities are more convenient than others. Mankind has 
experimented with many different ones, and has selected 
gold as the best. The selection has been made by tacit 
agreement, not by convention. 

All trade is essentially barter, even when carried on by 
the use of gold. 

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The value of any standard money depends upon its utility 
or usefulness^ />., upon what the consumers of the com- 
modity are willing to pay for it for other than monetary 
uses ; for instance, for ornament. 

In every exchange the gold is of the same value as the 
thing for which it is exchanged, or is so considered by the 

The requisites of a good kind of money are portability, 
homogeneity, durability, divisibility, cognizability, and sta- 
bility of value. These requisites are found to exist in the 
greatest perfection in gold.' 

By the value of gold we mean the quantity of other com- 
modities that it will exchange for, at a given time. As value 
is a relation existing between different things, it follows that 
variations of value may arise from causes affecting either 
of them. 

Gold is not wholly free from variations of value, but is 
subject to fewer changes than any other substance which is 
fitted to be used as money. 


Felt's Historical Account of Massachusetts Currency, 

Bronson's Historical Account of Connecticut Currency, etc. 

Sumner's History of American Currency, 

Weeden's Economic and Social History of New England. 

Documents Relating to the Colonial History of New York, 

Brock's History of Tobacco (in Vol. Ill, Tenth U. S. Census). 

Hening's Statutes of Virginia. 

Ridgway's Origin of Currency and Weight Standards, 

HilPs Handbook of Greek and Roman Coins (London, 1899). 

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Coinage is the process of identifying and stamping a 
piece of metal intended to be used as money. Coins are 
of two kinds, namely : 

I. Those made by the government for private persons, j/" 
from metal deposited by them, without limit as to quantity, 
and full legal tender. 

II. Subsidiary coins made by the government for itself, ^ 
such coins being restricted in quantity, and sold to private ^ 
persons at more than cost, and being usually limited legal 

As regards coins of the first class, the government's 
stamp is merely a certification of the weight and fineness of 
the metal composing them. The prime requisites of such 
a coinage are : 

1 . That the coins shall contain exactly the amount of fine 
metal that the law prescribes ; 

2. That they shall be easily recognized ; 

3. That they shall not be easily counterfeited or altered ; 

4. That they shall not be easily abraded by ordinary use. 
The word " subsidiary " is usually applied to coins which 

constitute the small change of a country and which are 
legal tender only for limited amounts. In 

TokefcoTns^^ the United States the silver dollar must be 
classed as subsidiary also ; for, although it is 

full legal tender, the government does not coin it for private 

individuals as it coins gold. It is subsidiary, or subordinate, 


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to gold coins. It passes for much more than the value 
of the metal contained in it. Professor Taussig has fitly 
applied the term " large change " to the silver dollar. Coins 
made of copper or other base metal are called " token " coins. 
They are subsidiary coins for the smallest transactions. 

Subsidiary .coins, however much their metallic value may 
fall below their nominal value, may be kept at par either by 
restricting their quantity, or by redeeming them on demand. 
If the quantity is restricted to the actual needs of the coun- 
try for small change, they will be at par because they are 
among the necessities of life. Our government redeems its 
coins smaller than one dollar when presented in sums not 
less than twenty dollars. This is not strictly necessary. 
English subsidiary coins are at par with gold, although not 
redeemable directly. The government receives them at par 
for taxes, and the banks receive them in unlimited quanti- 
ties at par from their depositors, since they can use them in 
paying dues to the government. 

If subsidiary silver coins circulate at a value which is 
largely imaginary, the question may be asked. Why not 
make them of some other metal, or even of 
Metai'^^^ ^' paper ? There are no reasons except custom 
and convenience. A coin not heavier than a 
half dollar is more convenient than a piece of paper ; it is 
cleaner, and in the long run is probably cheaper, as it does 
not require frequent renewal. A cheaper coin might be 
made out of some other metal, but it is generally best to 
conform to the habits of the people. Having been always 
accustomed to a silver subsidiary coinage, no good reason 
is apparent why we should depart from it. 

The shape of coins is usually circular, but some are 
square, others oblong, others cubical. Many ancient coins 
were dish-shaped ; others in the form of rings. The first 
coins struck by the government in California were octagonal. 

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The copper coins of China, called "cash," have square 

holes in the center by which they are strung on a wire and 

hung over the owner's neck. The objects 
Shape of Coins. ,. , ., .. , , , 

to be aimed at in determining the shape of a 

coin are freedom from abrasion, exemption from alteration, 
and convenience in handling. Modern commerce tends to 
minimize the use of gold except to settle international bal- 
ances. For this purpose fine gold bars are best, as they 
are subject to hardly any abrasion and are much more 
convenient to bankers than ordinary coins. 

Coins have. been made, at different times and places, of 
iron, lead, tin, brass, copper, nickel, platinum, silver, and 
gold. There were coins of electrum in the ancient world. 
This was a mixture of silver and gold found in a natural 
state in the Tmolus Mountains in Asia Minor and else- 
where. Specimens found in the Tmolus ranee 
Materials. . , ^ . , . , , , 

m modern times have yielded 73 per cent 

gold and 27 per cent silver. Electrum was also produced 

artificially, with a larger proportion of silver, in order to 

debase the currency. 

In early Rome small payments were made by tale (/>., 

by counting), and large ones by weight. The Latin word 

pendo, from which our words " compensation," 

Weight Coins. ^ , , . , . , 

" expenditure," and " stipend " are derived, 

means to weigh. The shekel, the talent, the drachma, the 

pound, the penny, the peso, the livre, the franc, and the 

mark were originally the names of weights. They are 

instances of the transference of the name of a weight to 

a coin. 

A standard is a measure, by comparison with which the 

length, size, weight, capacity, fineness, value of other things 

is determined, as a standard inch, a standard gallon, etc. 

It is proper, therefore, to speak of a standard of weight, a 

standard of fineness, a standard of value. Our law says 

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that the dollar composed of 25j®^ grains of gold, nine-tenths 
fine, shall be the standard unit of value, and that ten times 
this amount shall be the eagle, etc. The amount of fine gold 

in the dollar is 23.22 grains. The smallest 
s^d^d*^'^ S^^^ ^^^^ °^^ produced at the mint is the 

quarter eagle (two dollars and a half) of the 
standard weight of 64J grains. The gold dollar is too 
small a piece for convenient use. Its coinage was discon- 
tinued by the act of September 26, 1890. The coins 
now authorized to be struck at the mint of the United 
States are the gold quarter eagle, half eagle, eagle, and 
double eagle ; the silver dollar, the half dollar, the quarter 
dollar, and the dime ; the five-cent piece of nickel and 
copper, and the one-cent piece of copper. 

We sometimes read of an " ideal dollar," a phrase imply- 
ing that there may be a dollar whose value is not embodied 

in any tangible substance, but is purely a 
Utf '*' Impossible "^^^^^^ conception. This is impossible. Money 

must be something which shall serve as a 
medium of exchange. There may be as many different ideas 
as there are different people. How should we choose an 
umpire to furnish ideas of the relative values of different 
kinds of property? Yet the Supreme Court of the United 
States, in the Legal Tender Cases, gravely maintained that 
" value is an ideal thing " and that " the gold or silver thing 
we call a dollar is in no sense a standard of a dollar." 

The government receives all the gold deposited at the 
mint by private individuals and converts it into coin or bars 

free of charge. All silver, nickel, and copper 

Scignioragft. » » rr 

coins are made by the government from its 
own metal and are sold to the public for gold or its equiv- 
alent. The profit which the government makes on such 
sales is called "seigniorage.'' It is the difference between 
the cost of the bullion and the price received for the coins. 

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The same term is applied to any charge which a govern- 
ment makes for coining a metal for private individuals. 
Formerly the seigniorage on silver subsidiary coins was 
only 5 to 7 per cent. Since the great decline in the price 
of silver took place, it has become more than i oo per cent. 
Formerly the government could buy only sixteen pounds of 
silver bullion with one pound of gold. Now it can buy 
more than thirty-five pounds for the same money. 

Although the law contemplates the deposit of gold bullion 
at the mint, or assay offices, of the United States, and the 

coinage of the same for the depositor^ yet 
Bumon!'''^^^ practically the Treasury buys the bullion 

and pays for it. The practice of the assay 
office in paying for gold varies according to the kind of 
bullion in the deposit. A depositor of bars from known 
assayers, or smelters, or of foreign coin of which the fine- 
ness can be readily approximated, is allowed at once 90 
per cent of the value ascertained by weight and calculation 
of the fineness. The balance is paid after melting and 
assaying. When the deposit is small, or when bullion is 
tendered without well-known "ear-marks," no advance pay- 
ment is made, but the full payment is made after assaying 
without waiting for coinage. Having bought the bullion, 
the director of the mmt determines what portion shall be 
coined and what portion converted into bars. A certain 
portion is always converted into "fine bars" for commer- 
cial use, the remainder into mint bars (^^ fine) suitable 
for coinage. 

The successive steps in the making of coins are : (i) 
assaying, (2) refining, (3) alloying, (4) coining, 'fhe bul- 
lion is first melted in a crucible. While in the molten state 
it is stirred until thoroughly mixed. It is then allowed to 
cool in the form of a brick. Small pieces are clipped from 
two corners of the brick most distant from each other and 

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given to two different assayers to test the fineness of the 

metal. If their tests do not agree within a certain fraction, 

the brick is returned to the melting pot and 

the process repeated. When the test is sat- 
isfactory and the amount of foreign substance is known, 
the whole of the impurity is removed by chemical means. 
Then the requisite amount of alloy is added, by remelting 
and mixing, to harden the mass. Thus, to nine pounds of 
pure gold one pound of copper is added, so that the coins 
shall be nine-tenths fine. 

The bullion is rolled into strips or ribbons a little wider 
than the doia to be struck. It is then "drawn" in a 
machine which reduces it to the thickness of 
the coin. The strips are then passed through 
another machine, which cuts out of them circular pieces, of 
the proper size, called "blanks." Each blank is examined 
by an expert both by weighing and by sounding. If one is 
found too light, or if it does not " ring true," it is returned 
to the melting pot. If it is too heavy, the excess of metal is 
removed by filing. 

The blanks are sent to a machine by which a slight 
rim is raised around the edge of the piece on both sides, 
so that its weight shall rest on the rim and not on the 
whole surface of the coin, in order to minimize the abra- 
sion. This process is called "milling." The blanks are 
then put in a cylindrical case and sent to the coining machine. 
At each revolution of the machine one blank drops from 
the bottom of the cylinder, is seized and conveyed to a 
sunken steel bed which contains » die that prints one sur- 
face of the coin. This bed has a serrated edge or " collar." 
Directly above this sunken die is a steel stamp containing a 
die which prints the other surface of the coin. This stamp 
descends on the blank underneath with sufficient force to 
impress upon it the letters and figures of both surfaces of 

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the coin. The pressure also squeezes the coin against the 
serrated collar, producing an indentation on the edge of 
the coin, the object of which is to prevent any clandes- 
tine removal of metal. If a piece were clipped from the 
edge, or if any portion were removed by filing, the fraud 
would be detected by the absence or irregularity of the 

Experience has shown that the work of coining cannot be 
safely intrusted to private enterprise. Between the years 
1830 and i860 there were numerous private 
taidmissnli^^^ manufactories of gold coins in the United 
States. They were situated in Georgia, North 
Carolina, California, Oregon, Utah, and Colorado.^ They 
turned out coins of varying goodness, all purporting, how- 
ever, to be of the weight and fineness of the government's 
coins. They were not counterfeits. They did not imitate the 
designs on the coins of the United States. Many of them 
bore the names and places of business of the manufacturers. 
They were ingots purporting to be worth the number of dol- 
lars stamped on them. The value of these five-dollar pieces 

1 The mint at Philadelphia has upwards of sixty specimens of private 
gold coins and many copper ones which circulated in the United States 
at one time and another. Examples of these private gold coins are 
shown in the frontispiece, viz. : 

1. Coined by Templeton Reid of Georgia. Value about Ji^5.oo. 
Mr. Reid afterward removed his coining apparatus to California. 

2. Bechtler Mint at Rutherfordton, N. C. Value about $4.90. 

3. Letters over the figure of a beaver are the initials of the persons 
composing the Oregon Exchai»ge Company. Value about $4.84. 

4. Letters J. S. O. mean J. S. Ormsby, the coiner of these pieces. 
Value ;^9.37. 

5. Mormon coin. Letters above the clasped hands mean Great 
Salt Lake City Pure Gold. Value $A-Z^' 

6. Pike's Peak (Colorado) coin. Value not known. 

7. Ingot of Moffat & Co., San Francisco. Value ;^i6. 

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ranged from $4.36 to $5.00. The people who took them in 
trade could not distinguish between them and were therefore 
liable to be cheated. The government did not forbid the 
private coining of gold until June 8, 1864. 

The weight of a new gold eagle, or double eagle, must not 
vary more than half a grain from the standard weight fix^ji in y 
the law. That of the smaller gold coins must' 
JfGo^* ^^^^ ^^^ ^^^y more than a quarter of a grain. This 
allowable variation is called the " tolerance of 
the mint.'' The "mint price" of gold is the amount of 
money which a given weight of standard gold will produce 
when coined. An ounce of gold nine-tenths fine will produce 
approximately $18,604. The fine ounce is worth $20,671. 
As the gold dollar contains 23.22 grains, the $20 piece con- 
tains 464.4 grains. The troy ounce contains 480 grains, or 
15.6 grains more than $20. ' Then 23.22 : 100 : : 15.6 : 67.1 

The mint price of gold in England is £^ lys. 10^^. per 
ounce. This is the exact amount of money which an ounce 
of gold of the English standard, \^ fine, will produce by 
coinage. Anybody can take gold to the British mint for 
coinage. In order that the holders of gold need not lose 
time waiting to have it coined, the law requires the Bank of 
England to buy all the gold offered to it at the price of 
£3 17^". 9//. per ounce. The difference between this price 
and the mint price (i^^.) is compensation to the Bank for 
interest and for the labor of weighing, assaying, etc. Coin- 
age in the United States is free ; that is, without expense to 
the depositor of gold bullion, but he is required to deposit 
also the alloy used in making the coins, or to pay the cost 
of it. 

We sometimes hear that the Bank of England has raised 
the price of gold, or is paying a premium for it. This means 
that its desire to obtain gold is such that it will forego a 

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part of the i^//. Strictly speaking, there cannot be a pre- 
mium on gold in a country which has the single gold 

standard, since that would imply that one gold 
on Gow*^^™ sovereign is worth more than another of the 

same weight and fineness. There may be a 
premium, however, on gold bars over gold coin, or on one 
kind of coin over another kind. The Bank of England 
sometimes charges a little more for American eagles than 
the metallic equivalent in pounds, shillings, and pence, and 
this is called a premium on American gold. This is not a 
premium on gold but on its form. 

There is a serious loss due to the abrasion of gold coin in 

England. Anybody to whom it is offered may 

weigh it, and if he finds it below the legal limit 
of tolerance the law requires him to cut it in half, or other- 
wise mutilate it, and return the parts to the person tendering 
it. Practically, however, nobody does this except the Bank 
of England or the officers of the government. The Bank 
weighs all coins offered to it and complies with the law by 
mutilating the light ones. The law, as it stands, throws the 
whole loss of abrasion of a coin on the last holder. This is 
a manifest injustice. The same rule prevails in the United 
States, although our law does not require anybody to mutilate 
coins of light weight. Anybody may refuse to receive them. 
So, practically, the loss falls upon the last holder here as in 
England. The evil is scarcely felt in this country since the 
circulation of gold is small and the consequent abrasion 

The new coinage law of Japan (1897) provides that if, in 
consequence of abrasion from circulation, any of the gold 
coins fall below the minimum circulating weight, the gov- 
ernment shall exchange such coins for others of the same 
face value without making any charge. It proceeds upon 
the assumption that it is possible to distinguish between 

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abrasion caused by ordinary wear and fraudulent abrasion, 
or " sweating." It is the opinion of some of the officials 
of the United States Mint that this is feasible, but there 
has not been sufficient time as yet to decide whether the 
Japanese experiment is a safe one. The reason why the 
government should bear the loss due to the abrasion of coin 
is that it has been caused by all citizens in common and 
ought not to fall exclusively upon a few. Governments 
generally have not been willing to assume this loss, lest 
such assumption should lead to systematic abrasion for 
purposes of gain. 

Fraudulent abrasion and clipping of coins were a great 
pest in the seventeenth century. The silver coins circu- 
lating in the colonies were chiefly Spanish 
Douw^^**^ dollars — sometimes called "pieces-of-eight," 
being of the value of eight reals — and their 
fractions. They were brought in by trade with the West 
Indies. Some were coined in Spain and others in the 
Spanish- American colonies. At their best estate they were 
not uniform in either weight or fineness, and they had been 
much tampered with by sweating and clipping. The heavier 
ones were constantly culled out to make remittances abroad, 
since they were received in England by weight only. Those 
which remained in the colonies grew lighter and lighter, 
until, in 1652, the pieces in circulation had lost about 
one-fourth of their original weight. 

When two kinds of money, differing in value, are equally 

current, the worse drives the better out of circulation. The 

reason is that brokers, bullion dealers, jewel- 
Gresham's Law. ,, tii'n i ^ 

ers, and others who habitually make a profit 

from the use and handling of the precious metals, select the 

full-weight coins for melting, or exportation, and pass the 

light ones into the circulation. The same rule applies in a 

case where money of two metals, like silver and gold, is 

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coined without limit at the mint, and both kinds are equally 
legal tender. If there is a slight difference in the metallic 
value of the different kinds of dollars, the more valuable 
ones will be exported by bullion dealers and the less valu- 
able retained for domestic use. This is called Gresham's 
Law from Sir Thomas Gresham, who explained it to Queen 
Elizabeth about the year 1559. 

In order to correct the defects of a constantly depreciat- 
ing currency and to fix a standard of money, the colony 
of Massachusetts, in 1652, decided to estab- 

c^ioniai Coins. ^^^^ ^ ^^^^ ^^^ ^^^ coinage of shillings, six- 
penny, and three-penny pieces. Conforming 
to the depreciation that already existed, she gave to the 
shilling the weight of 72 grains, which was 22^ per cent 
less than that of the English shilling. The English standard 
of fineness was preserved. The colony did not itself 
operate the mint, but made a contract with one John Hull 
to do the work, requiring him to receive and coin all 
the silver offered to him and authorizing him to retain 
as his pay one shilling out of every twenty which he pro- 
duced. The mint was closed by order of the home 
government in 1686. 

These early Massachusetts coins had two different devices. 
The first issues of the mint were plain circular discs bearing 
on one face the letters " N E " (New England) 
ShmSg!'^'^* and on the other face " XII " for the shillings, 
" VI " for the sixpences, and " III " for the 
three-penny pieces. These pieces, by reason of their plain- 
ness, offered every facility to coin clippers, by whom they 
were speedily reduced in size and weight. In order to pre- 
vent such fraud a change of design was adopted by which 
the figure of a tree was stamped on one face and a row of 
dots and lettering was placed around the margin of the 
other. This became known as the " pine-tree coinage." 

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The disorders of the currency due to the clipping and 
sweating of coin led to different valuations of the Spanish 
" pieces-of-eight " at different places. On the 
tionof^me**" ^^^^ ^^ June, 1704, a proclamation was issued 
by Queen Anne on this subject. It first stated 
the actual value of foreign coin circulating in America, in 
terms of sterling money,^ according to the assays of the mint. 
" Sevil pieces-of-eight old plate,^ 17 pennyweight 12 grains," 
were equal to 4^". dd. The proclamation then says that 
" from and after the first day of January next no Sevil, pillar, 
or Mexico pieces-of-eight shall be accounted, received, taken, 
or paid within any of our colonies or plantations at above the 
rate of six shillings per piece, current money, for the dis- 
charge of any contracts or bargains to be made after the 
said first day of January next." Six shillings were consid- 
ered by the home government a fair average of the various 
colonial valuations of the Spanish dollar. This valuation 
came to be known everywhere by the term " proclamation 
money" or "proc. money.'* One hundred pounds sterling 
was the equivalent of £^ZZ\ proclamation money. 

The proclamation was generally disregarded, because it 

interfered with the habits of the people. See- 

It is disregarded. . , , , . , , 

mg that the proclamation was not regarded. 

Parliament, in 1707, embodied it in a law and decreed a 
penalty of six months' imprisonment and a fine of ;^io 
for each violation of it. This act was disregarded as com- 
pletely as the previous proclamation had been. Each col- 
ony continued to keep its accounts in its customary pounds, 
shillings, and pence, which were different from those of 
England and which differed among themselves. Thus, in 
New York, the Spanish dollar was rated at Zs. and in 
Pennsylvania at 7J". dd, 

1 The word " plate " (Spanish plata^ silver) is here used to signify 
Spanish silver money, not bullion. Old plate meant old coinage. 

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The phrase " money of account " means the money in 
which people keep their accounts and in which they think. 

The money of account of all the American 
Account* colonies was pounds, shillings, and pence, but 

there were no such things in circulation except 
a limited amount of the pine-tree coinage. The money in 
actual use was the Spanish dollar and its fractions, more or 
less clipped and abraded. The division of the dollar into 
one hundred parts was not made till 1792. By a law of that 
year Congress enacted that the money of account of the 
United States should be dollars, dimes, etc., but it did not 
become so in practice until after the Civil War. Before 
that era the price of merchandise was quoted in dollars, 
shillings, and sixpences. 


Coins are pieces of metal stamped to indicate their weight, 
fineness, and the rate at which they shall pass in trade. 
Ours are of two kinds : (i) full legal tender, being pieces 
of gold deposited as bullion by private persons, upon which 
the government has put a stamp showing its weight and fine- 
ness ; (2) limited legal tender, or subsidiary, being small 
pieces of silver, nickel, or copper, made by the government 
from its own material, and sold to citizens for small change. 

The standard unit of value in the United States is the gold 
dollar, but, being inconveniently small, it is not now coined. 

The gold coins struck at the mint are the double eagle 
(twenty dollars) and its submultiples down to two dollars 
and a half. The subsidiary coins are the silver dollar (one 
hundred cents) and its submultiples down to one cent.^ 

iThe exceptional character of the silver dollar will be considered 
more fully hereafter. 

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Seigniorage is the profit made by the government in the 
manufacture of coins. In the United States this profit arises 
from silver, nickel, and copper coins only. 

Coining is now universally considered an attribute of sov- 
ereignty. There have been times, however, when private 
coining was permitted, and such was the case in the United 
States prior to 1864. 

Gold coins when abraded more than one-half of one per 
cent are legal tender only in proportion to their weight. 

The ** mint price of gold " is the amount of money that a 
given weight of gold, say one ounce, will produce when coined 
in accordance with law. 

When two kinds of money differing in actual value are 
equally current, the worse drives the better out of circulation, 
because brokers, bullion dealers, etc., select the better for 
hoarding, or melting, or exportation. This principle is called 
" Gresham's Law." 


Linderman's Money and Legal Tender. 
Muhleman's Monetary Systems of the World. 
Watson's History of American Coinage. 
Snowden's Coins in the Cabinet of the United States Mint. 
J evens' Money and the Mechanism of Exchange. 
Falkner's article on the Private Issue of Token Coins, in the 
Political Science Quarterly^ June, 1901. 

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Anything which can be lawfully used in payment of a 
debt expressed in terms of money, and which creditors are 
required to accept, is called legal-tender currency, or simply 
legal tender. 

The principle of legal tender did not have its origin in 
an act of conscious legislation. The government begins, at 
a time when metal is circulating by weight, to 
Te^er^^^^ certify the weight and fineness. It stamps 
small ingots in order to avoid the necessity 
of frequent weighing. This is coinage. Then people make 
contracts in terms of the government coinage, and the 
government enforces the contracts. Under Roman law the 
creditor was obliged to take in payment whatever the gov- 
ernment was coining. 

The origin of legal tender in the modern world is con- 
nected with the reestablishment of the double standard of 
gold and silver in Western Europe in the thirteenth century, 
in place of the single silver standard which previously pre- 
vailed. The double standard means that debts may be 
paid at the debtor's option with either one of two metals 
coined into money according to a ratio fixed 
i^wlixf^^ ^y P^^^^^ authority — providing, for exam- 
ple, that one pound weight of gold shall be 
the equivalent in law of fifteen pounds of silver, the mints 
coining both metals without limit for private persons. The 
establishing of such a ratio was considered, from very 


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early times, an attribute of sovereignty, and in monarchical 
countries a prerogative of the crown. Each proclamation 
of the ratio was virtually a legal-tender act. Debts had to 
be paid in one or the other of two metals. Consequently 
any man, or body of men, who could fix the ratio, could 
decide how much of either should be paid. 

From the analytical point of view, a legal-tender act is 
nothing but an act of legal force, establishing a new defini- 
tion of an old terrn — for instance, " dollar " — which has 
been customarily used in making contracts. It is essen- 
tially ex post facto legislation, binding the courts to a new 
interpretation of existing contracts, and incidentally inflict- 
ing varioiis degrees of injury on those whose position is 
such that they cannot take advantage of circumstances to 
modify existing contracts — as for wages. Extreme cases 
may be imagined where such action might be needful in the 
interest of the general welfare, but with very few exceptions 
the passage of such an act is a subterfuge of a government 
for giving to itself, or to some favored class, immediate 
advantage over part of the community concerned. 

Gold and silver were made full legal tender by the Con- 
gress of the United States at the ratio of i to 15 in 1792. 
The coinage act was based upon a report of Alexander 
Hamilton, Secretary of the Treasury. Hamilton examined 
the question of the standard with great care, and although 
the conclusion he reached was erroneous, it is interesting to 
observe how near he came to the truth. He thought that 
gold was better fitted to be the standard than silver because 
it was less liable to fluctuations of value and also because 
it was the standard de facto. He observed that the silver 
dollar of Spain in actual circulation had no standard value 
by weight and fineness, but circulated by tale, " very much 
as a mere money of convenience," whereas gold money had 
a fixed weight by the custom of merchants. This fixed 

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weight was 24f grains of fine metal per dollar.^ While this 
consideration favored the adoption of the single gold 

standard, Hamilton says that "to annul the 
age ^?* ^°^' "^^ ^^ either of the metals as money [of full 

legal tender] is to abridge the quantity of circu- 
lating medium, and is liable to all the objections which arise 
from a comparison of the benefits of a full with the evils of 
a scanty circulation." He thought also that a country could 
draw to itself a greater quantity of the precious metals in 
international trade by means of the double than of the 
single standard. This conception was erroneous, but it was 
the common belief of the time. 

Hamilton accordingly recommended the double standard 
at the ratio of 15 to i. He had not failed to note that the 
Spanish silver dollars in circulation were of two different 
coinages, varying slightly in weight. He decided to take 
neither of them as the exact basis of our coinage, but to 
take instead the average of the dollars in actual circulation. 
By reason of abrasion they were somewhat lighter than the 

new coins then issuing from the Spanish 
Tendlr.^^^^ mints. With these facts before him and 

havmg regard also to the market ratio of 
the two metals in Europe, he decided that the ratio of 15 to i 
would be not far from the true metallic equivalent. Taking 

1 Hamilton here perceived the fact that a standard of value may 
exist, and have controlling force in mercantile circles, without any stat- 
ute law, and without any conscious" action on the part of merchants 
themselves. The gold standard was in practical operation in his time, 
just as the silver standard was in operation in the colonies when tobacco 
and other forms of barter currency were used. The mind of the trader 
was fixed upon, and governed by, a standard different from the one 
that most commonly passed from hand to hand. In a book of merit 
and originality, entitled TAe Evolution of Modern Money (Macmillan, 
1 901), Mr. W. W. Carlile has traced the existence of what we may call 
the " latent gold standard " in Europe for a long period before gold 
became the avowed standard. v 

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the gold valuation of the dollar (24! grains of pure metal) 
as the starting point, and multiplying by 15, the product, 
37 li grains of pure metal, was adopted for the silver dollar. 
The smaller coins were to be of proportionate weight and 
full legal tender. Congress followed these recommendations 
in the coinage act of 1792. 

The mint began to coin silver in 1794 and gold in 1795. 
It was supposed that there would soon be a plentiful supply 
of coins of both metals ; but, in order to provide for the 
interval while the mint was in course of erection and equip- 
ment, Congress passed a law making certain foreign coins, 
of both gold and silver, legal tender in the United States 
according to their weights respectively. This act was to 
remain in force three years after the starting of our mint 
and no longer, but by reason of the difficulty experienced 
in retaining our own coins in circulation the legal tender of 
foreign coins was kept in force by repeated reenactments 
for more than sixty years. We did not have any settled 
money of our own until after the passage of the act of 1853 
providing for a subsidiary coinage. 

The first sitver dollars turned out by our mint were a 

little lighter than, new Spanish dollars, but they passed in 

trade for the same value, both here and in the West Indies. 

Brokers began to collect and export them to the Spanish 

colonies, where they were exchanged for Spanish dollars, 

and the latter were brought back for recoinage at our mint. 

There was a profit of one per cent in the 
Its Failure. . . . t - 

operation. As coinage was free, the govern- 
ment was working for bullion brokers without pay, and was 
not accomplishing the end aimed at. It was not supplying 
the American people with American money. Accordingly 
President Jefferson, in 1806, gave an order to the mint to 
stop the coinage of silver dollars altogether. This order 
remained in force thirty years. 

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The legal ratio of 15 to i, although pretty close to the 
market ratio at the time when the coinage act of 1792 
was passed, did not long remain so. In 1797 the market 
ratio in Hamburg was 15.47. Gresham's Law asserted itself. 
American gold coins began to grow scarce. They were 
melted or exported because they were worth more for that 
purpose than for debt-paying at home. As early as 181 7 
they had entirely disappeared from circulation, although 
the coinage of them continued at the usual rate. 

In 1834 the market ratio in Hamburg was 15.73 and 
gold bore a premium in brokers' offices in the United 
States of 4 J per cent over silver. Congress had had the 
subject of a change of the legal ratio under consideration 
since 1818. In 1834 it passed the Gold Bill, — so called 
because it was intended to bring gold again into circula- 
tion. The ratio adopted was approximately 
c^iiagrAct. - ^^ ^^ ^- ^^^ amount of pure metal in the 
silver dollar remained unchanged. That of 
the gold dollar was reduced from 24.75 grains to 23.2 
grains, but was increased in 1837 to 23.22 grains, at which 
weight of* pure metal it now stands. This made the gold 
dollar 2 per cent less valuable than the silver one at that 
time. It was a debasement of the currency to that extent. 
There was strong opposition to the bill, on the ground that 
it would drive our silver coins out of circulation. Neverthe- 
less, the majority in favor of the bill was very large in both 
branches of Congress, about four to one in the House and 
five to one in the Senate. 

When the law of 1834 was passed, the premium on gold 
in the market was 4^ per cent. Anybody having $100 
gold could buy $104.50 silver to pay his debts with. The 
government had never promised to hold the market ratio 
of the metals steady at 1:15. This had come in the course 
of time to be 1:15.625. Under the new law anybody 

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having $ioo silver could buy $102 gold to pay his debts 
with. In other words, the standard was debased 2 per 
cent. The law of 1834 ought to have provided that 
preexisting contracts should be settled on the preexisting 

There were no silver dollars in circulation, since the coin- 
age of them had been discontinued by order of President 
Jefferson, as already stated. As our smaller 

Silver Coins in silver coins were of full weight, they were 

the United States 

prior to X853. melted and exported, and their place in the 

circulation was taken by light-weight foreign 
coins, principally Spanish and Mexican. Two halves or four 
quarters, if new and full weight, were worth about 2 cents 
more than a gold dollar. Consequently they were collected 
by brokers and exported. But two halves, or four quarters 
that had lost 2 cents' worth, of silver by abrasion, would 
circulate, because there would be no motive to melt or 
exfkjrt them. From 1834 to 1856 the silver money of this 
country consisted, to a large extent, of foreign coins, more 
or less worn, chiefly Spanish and Mexican, but with a con- 
siderable sprinkling of English, French, German, and Scan- 
dinavian pieces. Every merchant kept a coin-chart manual 
for handy reference to determine the value of these pieces 
as they were offered in trade. 

In the act of 1853 we adopted the principle of the British 
act of 1816.^ The debates in Congress on this bill show 
that it was the fixed intention of its promoters to establish 
the single gold standard, and that there was scarcely any 
opposition to the project. They failed to carry out this 
intention, however, since they left the silver dollar in the 
list of coins to be struck at the mint if anybody should 
choose to deposit silver bullion for that purpose. Our 
silver dollar was still a favorite coin in China, where it 
1 See page 63. 

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passed by weight. This was probably the reason why it 
was not treated like our other silver coins in the act of 

1853. The silver dollar was worth four cents 
our Third Coin- ^^^^ ^.j^^^ ^^^ j^ ^^jj^^. j^ ^^^ bullion mar- 
age Act. ® 

ket. Consequently none were to be found 

in circulation, although upwards of $5,600,000 were coined 
between 1853 and 1873. All of these must have gone to 
China except a few which were retained in coin collections 
and as curiosities. The act of 1853, however, accomplished 
its main object. It gave the country an abundance of new 
and bright half dollars, quarters, dimes, and half dimes 
that would stay at home and serve the purpose of small 
change. In 1857 the legal-tender faculty was taken away 
from all foreign coins, both gold and silver, and the Span- 
ish quarters, eighths, and sixteenths then in circulation 
were made receivable at government offices at only 20, 
10, and 5 cents respectively, — a reduction of one-fifth of 
their nominal value. Hence they gradually passed out of 

In 1873, when the next change took place in our coin- 
age system, the country was under the regime of irredeem- 
able paper. Neither gold nor silver was in circulation. 
Practically the silver dollar had never been in circulation. 
To Americans it was an unknown coin. From 1797 to 
1806 it had been sent out of the country by speculators to 
be exchanged for Spanish dollars. From 1806 to 1836 the 
mint had ceased to coin it altogether. After 1836 its cir- 
culation was rendered impossible by reason of its premium 
over gold in the bullion market. 

In 1869 ^^6 Treasury Department undertook a revision 
of the coinage laws. Mr. Boutwell, the Secretary, placed 
the work in the hands of Mr. John J. Knox, who prepared 
a bill which made the silver coins of the United States legal 
tender for only $5.00 in one payment. This included a 

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silver dollar of 384 grains, but it was omitted by Con- 
gress and the " trade dollar," of 420 grains, intended for 
circulation in China, was substituted. The bill provided that 
no silver coins except those enumerated should 

trade dollars should be coined for private 
individuals. The silver dollar at that time was worth about 
two cents more than the gold dollar. The bill made the 
gold dollar the unit of value. 

Mr. Knox's report and the accompanying bill were sent 
by the Department to chambers of commerce throughout 
the country and to persons interested in monetary science, 
in order to get their opinions and advice. They were sent 
to Congress in April, 1870. The bill passed the Senate 
on the loth of January, 187 1, but was not reached by the 
House in time for passage by that Congress. It came up 
in the next Congress, and after debate in the House, in 
which the policy of discontinuing the silver dollar was 
specially discussed, it passed that body, May 27, 1872, by 
a vote of no to 13. It passed the Senate January 17, 
without a division, and became a law February 12, 1873. 
The United States thus adopted the single gold standard. 

Private persons were allowed to deposit silver bullion 
at the mint and have it coined into trade dollars for their 
own account. It was never intended that the trade dollar 
should circulate in the United States at all, but it was inad- 
vertently placed in the list of coins which were legal ten- 
der for $5.00. As soon as the price of silver fell so that 

420 grains were worth less than a dollar, it 
DoUar^** became profitable for owners of silver to have 

these dollars coined and put in circulation at 
home. Straightway they began to fill the channels of retail 
trade. They became so great a nuisance that Congress, in 
1876, took away their legal-tender quality altogether. This 

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led to a dispute, with a charge of bad faith. So Congress, 
in 1878, discontinued the coinage of trade dollars entirely. 
This only aggravated the dispute. Speculators bought up 
the trade dollars with the expectation that the government 
would eventually redeem them at par. Nearly $2,000,000 
of them were reimported from China for that purpose. 
Finally, in 1887, Congress passed a bill to redeem at par 
all that should be presented within six months, and Pres- 
ident Cleveland allowed it to become a law without his 
signature. The number of trade dollars so redeemed was 

The following varieties of legal tender exist at the present 
time under the laws of the United States : 

1. Gold coins, legal tender without any 

Present Varieties ^xoress limit 
of Legal Tender, ^xprebb iimu. 

2. Silver dollars, and Treasury notes issued 
under the act of 1890, legal tender "except where otherwise 
expressly stipulated in the contract." 

3. United States notes (greenbacks), legal tender except 
for interest on the public debt and for duties on imports. 
Since the resumption of specie payments (1879) these notes 
have been made receivable for duties by Treasury order, to 
avoid the trouble of carrying gold to and from the custom 

4. National bank notes, legal tender in payment of any 
debt or liability to any national bank ; also receivable for 
all government dues except duties on imports. 

5. Silver coins smaller than $1.00, legal tender to the 
amount of $10 in one payment. Coins of nickel and copper, 
legal tender to the amount of 25 cents in one payment. 

1 A detailed account of the struggles of the government with the 
trade dollar is given in Upton's Money in Politics. 

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Legal tender may consist of anything which the law 
of a country declares shall be received in discharge of an 
obligation which is payable in money. 

There are several different kinds of legal tender in the 
United States. That of gold coin is the only one which is 
not subject to any limitations. 

If a law of tender is made applicable to debts contracted 
or to bargains made before its enactment, and it alters the 
terms thereof, it is unjust. It is sometimes said that a 
change in the law of tender exhausts itself on past debts ; 
that while people cannot avoid accepting the new legal- 
tender thing for preexisting dues, yet that they straightway 
adjust their business and bargains to the new law, and thus 
escape further harm. This is true of only a very small part 
of the community. The masses either do not understand 
the subject sufficiently, or are so entangled in the social 
fabric that they cannot protect themselves. For example, 
no individual workman can raise his wages by his own 
volition merely because his cost of living has increased. 

A law of tender adds nothing to the value of gold coins. 
The private gold coins that circulated in the United States 
between 1830 and i860 were not legal tender, yet they were 
of equal value with government coins when they contained 
the same amount of gold. Gold bars are not legal tender, 
yet they occasionally command a small premium over coin 
by reason of their convenience in international trade. 

The first coinage act of the United States (1792) made 
all of our gold and silver coins full legal tender at the 
weight ratio of i to 15. Under this act gold gradually 
disappeared from the circulation, one ounce of it being worth 
more in the bullion market than fifteen ounces of silver. 

The second general coinage act (1834) made both gold 

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and silver coins full legal tender at the weight ratio of i to 
1 6. Under this act silver was expelled from the circulation, 
sixteen ounces of it being worth more in the bullion market 
than one ounce of gold. In this act the legal tender was 
debased about 2 per cent by diminishing the weight of the 
gold coins. 

The third general coinage act (1853) lessened by 7 per 
cent the amount of fine metal in the silver coins smaller 
than $1.00, in order to prevent their exportation. It limited 
the legal-tender faculty of these silver coins to $5.00 in one 
payment. It did not change the legal- tender act of 1834 
in any other particular. The half dollar weighs 12 J grams 
(French metric system). Two of them are exactly the 
weight of the five-franc piece. The quarter dollar weighs 
one-half and the dime one-fifth as much as the half dollar. 

The fourth general coinage act (1873) omitted the silver 
dollar from the list of coins authorized to be struck at the 
mint and made the gold dollar the unit of value. At that 
time the silver dollar was worth more than the gold dollar. 
The act of 1873 put the United States on the basis of the 
single gold standard. * 

Legal-tender notes will be considered in a subsequent 


In addition to those of the preceding chapter: 
Hamilton's Report on the Mint. 

Laughlin's History of Bimetallism in the United States, 
Brough's Natural Law of Money. 
F. A. Walker's Money. 
Upton's Money in Politics. 

History of the Coinage Act of i8yj^ published by the House 
of Representatives, 1900. 

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The metal gold occupies a unique place among the sub- 
stances of which the earth is composed. It is accepted by 
civilized mankind without compulsion and without limit in 
exchange for all other kinds of property and for all the serv- 
ices that men render to each other for hire. For this rea- 
son it is an object of universal desire. As a mineral it is 
sought for with greater eagerness than any other substance 
in or upon the earth. 

Gold is yellow in color in the natural state, and is the 
only metal that is so. Its atomic weight is 196.7, that of 
hydrogen being reckoned as i. Its specific gravity is 19.3, 
being exceeded only by that of platinum, iridium, and 
osmium. Its melting point is 2014° F., at which temper- 
ature there is no perceptible loss by volatilization, even 
when long continued and often repeated. It is the most 
ductile of the metals. It can be beaten into sheets ^jf^j^j^ 
of an inch in thickness. A single grain can be drawn into 
a thread 500 feet long. As a conductor of electricity it is 
inferior only to silver and copper. 

Gold is found in placers in the beds of existing rivers or 

in those of past geological ages, which are now dry or 

uplifted, or buried under new strata. It is also 

Where Gold found in veins of rock formation. It has been 

18 found. 

found in the United States in rocks of all 

geological ages from the pre- Silurian to the Quaternary. It 

was the opinion of Professor Newberry that the metal in 


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fissure veins was deposited there from chemical solutions 
forced upward from deeply buried rocks of various kinds, 
from which the gold had been leached under great pres- 
sure and heat. Gold is found also in bedded veins of 
sedimentary rock in conjunction with argentiferous galena, 
iron pyrites, and other metals, where there is no trace of a 
fissure. It has been found in common clay, and also traces 
of it in sea water. Placer gold has been separated from 
vein formations and conveyed by running water, in con- 
junction with gravel and other detritus, to the places where 
it is found. 

Gold does not suffer any change by exposure to the air 
or by being buried in the earth. It is rapidly dissolved in 
quicksilver at ordinary temperatures, and forms with it an 
amalgam, either fluid, or pasty, or solid, according to the 
proportions of each metal present. The quicksilver can be 

distilled from the mass by heat and recovered 
O^ifk^iver'^' ^^ condensation, leaving the gold solid. It 

thus becomes an agent of supreme impor- 
tance in the production of gold. Its use was known to the 
ancients. Pliny says with truth that if gold mixed with 
impurities is shaken in a vessel containing quicksilver, the 
latter will absorb the gold and reject the impurities, and 
that the quicksilver can then be squeezed through a skin 
like perspiration, leaving the gold pure. Quicksilver has 
the same affinity for silver as for gold. 

Placer gold is of various sizes, ranging from dust up to 
nuggets weighing many pounds, and of varipus degrees of 

purity. That of Australia averages gijo in 
Placer Gold. , . i u . . 

I GOO, being purer than any gold coin now m 

use ; that of California averages 884 ; that of Montana 
895. Native gold is almost always associated with silver. 
In 1000 parts of placer gold of California, 112 are com- 
posed of silver, and 4 of base metal. 

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The most common method of obtaining alluvial or placer 
gold is by washing river sands. " Panning " was practiced 
by the Egyptians in prehistoric times. This process con- 
sists of stirring with the hands a quantity of gold-bearing 
sand in a hollow vessel filled with water. The gold, being 
heavier than the other material, sinks to the bottom. The 
earthy matter is spilled over the top of the vessel from time 
to time as the stirring proceeds. When the panful has 
been thoroughly washed most of the gold contained in the 
mass will be found in the bottom of the pan. As there is 
always some sand and gravel left, it is customary to collect 
the gold by means of quicksilver. 

Sluicing is the method by which auriferous sands and 
gravels are now attacked in places where water can be 
obtained in sufficient quantity. In the ancient world water 
from gold-bearing mountains was made to flow over hides, 
or sheepskins, in which the particles became entangled. 
Thence, probably, came the legend of the golden fleece. 

Sluicing is performed by shoveling gold-bearing earth 
into running water, which is made to pass through a wooden 
conduit, on the bottom of which are fastened a series of 
" riffles," or obstructions, against which the heavier portion 
of the material lodges. Quicksilver is fed into the stream 
at various places in the form of a fine rain, 
?oUe^on°* ^^^"g squeezed through chamois leather or 

canvas to give it dispersion. It passes down 
the inclined surface and lodges with the other heavy material 
against the riffles, where it collects the gold by amalgama- 
tion. When the first riffle is full, the material suspended in 
the water passes over the obstruction and is caught in the 
next one, and so on till all are filled. Then the " clean-up " 
begins. The gold is found amalgamated with the quicksilver. 

Hydraulic mining is sluicing on a large scale, in which 
the force of a jet of water is used, instead of shoveling, to 

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break down the bank and move the earth and gravel to the 
entrance of the sluice. For this purpose a powerful head 
of water is required, from one hundred to three hundred 
feet higher than the ground to be operated on. The water 
is collected in mountains, sometimes at long distances from 
the works, and brought in ditches which follow the contour 
of the country, often crossing valleys on high trestlework 
or by inverted siphons. Sometimes the " pay gravel " is 
found where there is insufficient drainage, and it becomes 
necessary to excavate tunnels to carry off the "tailings?' 

One such tunnel in California is 7374 feet 
MinSg^^^ long. The water is delivered against the 

bank through an iron nozzle with something 
like the velocity of a cannon ball. It soon excavates a 
hole, which is gradually enlarged until the superincumbent 
mass falls down. Then this is attacked by the same 
means, and the whole mass begins to dissolve and follow 
the drainage line, which brings it to the sluices con- 
structed like those already described, but on a much 
larger scale. They are operated on the same principles 
as the smaller ones. 

The disposition of the tailings has been the most serious 
problem of hydraulic mining in California. Not only is the 
natural drainage of the country altered by these operations,* 
but stupendous quantities of earth are carried down and 
deposited in the beds of the rivers, which are caused to 
overflow their banks and spread the detritus over the 
adjoining lands, to the ruin of agriculture. A vast deal of 
litigation has ensued, and the state legislature has been 
compelled to intervene for the protection of the farmers. 
Hydraulic mining is the most economical of all methods of 
obtaining gold, the cost being from i^ cents to 8 cents per 
ton of material treated. The most expensive is panning, 
the cost of which is $5.00 to $8.00 per ton. 

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Gold existing in rock formation is either free-milling or 
combined chemically with other substances. Often both 
are found in the same mine. Free-milling ores are treated 
by crushing and then amalgamating with quicksilver. In 
reaching the metal and tearing it from the rock, man 
accomplishes with his own hands what nature has done 
for him in the case of placer gold. 

There are numerous methods of crushing free-milling 
ores, the one most largely used being that of the stamp 
battery. The ore is first reduced to the size 
of a walnut by a stone-breaker. It is then 
put into an elongated mortar made of cast-iron, which has a 
series of iron pestles arranged side by side, so as to be 
lifted, one by one, by a revolving wheel and allowed to fall. 
Water is supplied to keep the mass in a splashing state, 
and also quicksilver to amalgamate the gold as it is released 
from the pulverized rock. Sometimes the sides of the 
mortar are lined with copper plates, which have been 
previously amalgamated with quicksilver, as the amalgam 
produced in the mortar tends to adhere to the surface of 
such plates. The contents of the mortar are thus reduced 
to a "pulp," which is allowed to flow slowly over a series 
of amalgamated copper plates, by which still more of the 
^old is amalgamated and retained, the remainder passing 
off as tailings. The tailings contain some gold, and are 
subjected to further treatment. The excess of quicksilver 
in the amalgam is recovered by squeezing it through filter- 
bags of chamois leather or buckskin, which leaves a solid 
amalgam. The remainder is evaporated by heat and the 
vapor condensed by passing through pipes which are sub- 
merged in cold water. The solidified gold remains. 

There are two important chemical processes for the 
extraction of gold from sulphides and other refractory ores : 
one by chlorine, the other by cyanide of potassium. By 

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the former the ore is first reduced to sizes small enough to 
expose all the gold contained in it to contact with chlorine 
gas. It is then roasted, either in a reverberatory or a 

revolving furnace, in order to expel sulphur, 

arsenic, and other impurities which would 
impede the action of the chlorine. The charge is then 
drawn from the furnace and allowed to cool, after which it 
is shoveled into a vat and impregnated with chlorine gas. 
Then it is leached with water as wood-ashes are leached for 
making lye. The resulting liquor contains chloride of gold, 
which is usually precipitated by adding to it a solution of 
sulphate of iron, the gold falling to the bottom in the form 
of a powder, and usually in a very pure state, sometimes as 
high as 990. Precipitation can be effected also by passing 
the solution over charcoal, to which the gold adheres, the 
charcoal being afterwards burned and the gold recovered. 

The cyanide process is of comparatively recent date. It 
has been in operation in the United States less than ten 
years ; in South Africa a little longer. A solution of 
cyanide of potassium will dissolve metallic gold. This 
affinity is now the basis of great industries and has enabled 
mankind to save large quantities of the precious metal that 
would otherwise have been lost. The process is substan- 
tially like that of chlorination, except that roasting is not 
generally required. The ore is first comminuted, as in 
chlorination, and* placed in large vats, where it is leached 
by a dilute solution of cyanide, the liquor being allowed to 
remain until all the gold has been extracted. It is then 

drawn off by a stopcock into a box under 
Pr^cM*"*^^ the vat. The gold is precipitated by zinc 

shavings, and falls to the bottom of the box 
in the form of a slime. Another method of precipitating 
the gold is by electrolysis. A current of electricity is 
passed through the solution, and the gold is precipitated on 

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thin sheets of lead suspended in it and to which it adheres. 
These are melted in order to recover the gold. More 
recently sheets of aluminum have been used instead of 
lead, as the gold can be removed without injury to the 
sheets. The cyanide process has added largely to the 
productiveness of the gold fields of South Africa, and has 
made the accumulated tailings of past years a source of 
profit. It has made many mines profitable that could not 
be worked before. 

There are also many methods of extracting gold from 
metals associated with it, by smelting. 

It was the opinion of Professor Newberry twenty years 
ago that nine-tenths of all the gold in the possession of 
mankind had been obtained from placer deposits. At the 
present time the greater part of the annual increment is 
obtained from veins in rock formation. 


The metal gold is the common medium of exchange and 
measure of value among civilized peoples. It was used for 
purposes of ornament in the ancient world before it was 
used as money. 

It is found in detached fragments and particles in the 
beds of existing rivers and also of ancient ones now dry. 
In this situation it is called placer gold. The greater part 
of the metal now in the possession of mankind is placer 
gold. The most important agent for 'the recovery of placer 
gold is quicksilver, which dissolves it and forms an amalgam 
with it, the earthy matter being rejected. The quicksilver 
. can be easily separated from the amalgam and used 
again. Placer gold has been detached from rock forma- 
tions and conveyed by running water to the places where 
it is found. 

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Gold exists in rock formations in a comparatively pure 
state, and also in chemical combination with other sub- 
stances. It has been found in the United States in rocks 
of all geological ages.- 

Placer gold is easily separated from the earthy matter 
associated with it by means of water and quicksilver. 

Gold in rock formation is obtained by crushing the rock 
and either amalgamating with quicksilver, or treating it by 
chlorination or cyanide of potassium, or by smelting. 

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According to the statistics of the Director of the Mint, 
the world's production of gold for the first half of the nine- 
teenth century was $787,463,000, and for the second half 

The chief gold-producing countries at the beginning of 

the century were Mexico, Colombia, Brazil, Peru, and 

Buenos Ayres in the western hemisphere, and Russia and 

Hungary in the eastern. Small quantities were obtained 

also from the East Indies and from Africa. From 180 1 to 

18 10 the average annual yield from all countries was about 

$12,000,000, two-thirds of which came from American mines. 

Revolutionary disturbances in Mexico and South America, 

which broke out in 18 10 and continued till 

First Half of 1824, caused a great reduction of their out- 
the Nineteenth r 1 , 11 1 -i rr^i 1 i< 

Century. P^^ of both gold and silver. The world s 

production of gold declined to an average of 

$7,600,000 per year, which was not sufficient, in the opinion 

of Mr. William Jacob, a leading authority for that period, 

to supply the amount used in the arts and make good 

the loss by abrasion, shipwreck, and other accident. After 

the restoration of peace in those countries there was a 

gradual gain in their production of gold. That of Russia 

increased also, her average output from 1837 ^^ 1^4^ being 

$12,500,000 per year, or more than that of the whole world 

at the beginning of the century. The details of production 


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for the first half of the century, as computed by the Director 
of the Mint, are the following : 

Annual Total for 
Period Average Period 

i8oi-i'8io $11,815,000 $118,152,000 

1811-1820 7,606,000 76,063,000 

182 1 -1 830 9,448,000 94,479,000 

1831-1840 13,484,000 134,841,000 

1841-1850 36,393»ooo 363,928,000 

Half century .... $15,749,200 $787,463,000 

On the 19th of January, 1848, James Wilson Marshall 
found a small lump of gold in the tail-race of Sutter's saw- 
mill in El Dorado County, California. This discovery led 
to a search in the bed of the stream and in the adjoining 
ground, which was found to contain rich deposits of the 
precious metal. The news spread like wildfire through- 
out California and the Pacific coast of North and South 
America, and later to the Atlantic States, and all civilized 

countries, leading to a great immigration of 
AuluaTi^^''* gold-hunters. The production of the metal 

in California alone in 1850 was $36,000,000, 
being equal to the annual average of the whole world during 
the preceding decade. It reached $56,000,000 in 185 1. 
In the latter year a similar discovery of placer gold was 
made in New South Wales, Australia, followed by a still 
more important one in the colony of Victoria. These dis- 
coveries were also attended by public excitement and heavy 
immigration. The production of gold in Australia and 
New Zealand rose to $65,000,000 in 1854. Concurrently 
with these discoveries, there was a considerable increase 
of production in Russia, which reached $25,000,000 per 

The next great discovery of the precious metals was that 
of the Comstock lode in Nevada. This is a fissure vein 

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four miles long in rock of the Tertiary age. It is situated 
al^the base of Mount Davidson in the Virginia range, an 
offshoot of the Sierra Nevada. In the central part of the 
fissure its width is about 3000 feet. The gangue, or vein- 
stone, is quartz, not uniformly distributed in 
The^comstock ^^ fissure, but coagulated in large bodies 
called "bonanzas." The magnitude of this 
deposit may be inferred from the fact that, since 1861, 
when it was first worked scientifically, it has yielded 
$350,000,000 of bullion, and that 190 n^iles of shafts and 
galleries have been excavated in it. Forty per cent of 
the bullion produced was gold and 60 per cent silver. 
In 1882 the richest ore bodies of the Comstock lode 
had been exhausted, and the annual yield had fallen to 
$1,333,000, from which point, however, there was a recovery 
to $7,000,000 in 1887, due to the working of low-grade 
ores that had been previously neglected. 

In the meantime (in 1884) a discovery had been made in 
South Africa that was destined to surpass in magnitude the 

Comstock and every other deposit of the 
South Africa. . , , , , , , , 

precious metals that the world had ever seen. 

This was in the Witwatersrand of the Transvaal. Here the 
country rock is a bed of sandstone, interlaminated with 
deposits of conglomerate, which the Dutch call " banket." 
This conglomerate carries the gold, the average being ten 
pennyweights per ton of material. Borings to the depth of 
3500 feet have found the gold-bearing reef undiminished. 
The outcroppings of the reef have been traced for a dis- 
tance of forty miles. The production of the Transvaal in 
1898 was $78,070,761. There was an interruption of the 
working of the Rand mines in the latter part of 1899 and in 
1900 by reason of the war with Great Britain. In the latter 
year the production fell to less than $10,000,000. When 
the industry shall have been fully resumed the output will 

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probably be not less than $100,000,000 per year. There 

are other deposits of gold in the Transvaal which m^ 

prove to be as important as those of the Witwatersrand. 

One of the most surprising discoveries of modern times 

is that of the gold placers of the Klondike in the Yukon 

territory of Canada. These are deposits underneath ground 

which is perpetually frozen. The method of 
The Klondike. . . . 

obtaining the gold is by sinking a shaft 

through the frozen ground by means of hot bowlders. Then 

a drift is run by .building a fire against the face of the 

ground. The gravel is thrown out and left till summer, 

when it thaws and is washed by panning. All the gravel 

thrown out by two men in eight months of winter can be 

washed in two months of summer. Of course these deposits 

must have been laid down at a time when the climate of 

that region was much warmer than it is now. The output 

of the Klondike has been increasing steadily since the first 

discovery in 1894, in the face of enormous difficulties due 

to the severity of the climate and the cost of transportation. 

It is estimated at $20,000,000 for the year 1900, and that - 

of Canada entire at $26,000,000. Similar placer beds have 

been found at Cape Nome, Alaska. They yielded about 

$5,000,000 in 1900, and the yield of Alaska entire was 

nearly $8,000,000. 

The most important gold-bearing district in the United 

States now is that of Cripple Creek, Colorado. The ore at 

this place is a telluride known to mineralogists 
c^iorado^^^^' as calaverite. The country rock (says Mr. 

Philip Argall in Mineral Industry) is altered 
andesite, granite, or phonolite, containing thinly disseminated 
iron pyrites and tellurium minerals. At or near the surface 
the tellurium is oxidized, and the gold, when visible, exists 
as an ochre-like powder, "mustard gold." By roasting, the 
tellurium is oxidized and the gold set free in the Ofietallic 

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State easily soluble by cyanide or chlorination. The esti- 
mated yield of the Cripple Creek district in 1900 was 

There has been a remarkable increase of the yield of 
Australia in recent years, which rose to nearly |8o,ooo,ooo 
in 1899, the increase being due chiefly to new workings 
in West Australia. There was a slight decrease in the 
Australian production in the year 1900. 

Statistics of the world's production of gold 

Second Half of j^ the second half of the century, with details 
the Century. 

for the year 1899, as compiled by the Director 

of the Mint, are as follows: 

Annual Total of 

Period Averagb Period 

1851-1855 $132,513,000 $662,566,000 

1856-1860 134,083,000 670,415,000 

1861-1865 122,989,000 614,944,000 

1 866-1870 129,614,000 648,071,000 

1871-1875 ....... 115,577,000 577,883,000 

1876-1880 114,586,000 572,391,000 

1881-1885 99,116,000 495,582,000 

1886-1890 112,895,000 564,474,000 

1891-1895 162,947,000 814,736,000 

Forty-five years . . . $124,892,000 $5,621,602,000 

Single Years: 

1896 $202,251,600 

1897 238,812,000 

1898 287,428,600 

1899 306,584,900 

1900 (estimated) 258,000,000 

Second half century $6,914,679,100 

First half century 787,463,000 

Century $7,702,142,100 

Probably 10 per cent of the world's gold production 
escapes ^he notice of statisticians altogether. 

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The largest gold-producing countries in 1899 were: 

Australia . 
Africa . . 
United States 
Russia . . 
Canada . . 
Mexico . . 


British India 
China . . 
All others . 




Total . . ^^306,584,900 

In the year 1900 the United States resumed the foremost 
place among gold-producing countries. The production of 
the states and territories for the year was : 

Colorado . . 
California . . 
Alaska . . . 
South Dakota, 
Montana . . 
Utah .... 
Arizona . . . 


Nevada . 
Idaho . . 
Oregon . 
All others 

Total . 

;^2,3 50,000 


From these tables we learn that the production of gold in 
the second half of the century was nine times *as great as 
during the first half. Such an extraordinary addition to the 
world's medium of exchange must have had some sensible 
effect upon the prices of commodities. 

The amount of gold in various forms in Europe and 
America in 1848 was estimated by Tooke & Newmarch 
{History of Prices^ VI, 230) at $2,800,000,000 and of silver 
at $4,000,000,000, both metals being then available as 
money. These figures have been criticised by other statis- 
ticians as being too high, but we cannot hope for accuracy 
in a case where the data are so obscure and uncertain. To 
this mass, whether greater or less, there was added in the 
next twenty years $2,000,000,000 of gold and $680,000,000 
of silver. 

It was the Opinion of Cairnes and Jevons of England, of 
Levasseur of France, and of Soetbeer of Germany, eminent 

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economists and statisticians of the last half century, that 
the great output of gold in the fifties and sixties had caused 
an average increase of the prices of commod- \ 

Effect of Hew j^^^ equal to about 20 per cent. In some 
Gold on Pnces. ^ ^ ^ 

cases the increase was greater than the aver- 
age, in others less, and in still others it counteracted a 
decline of price which would ordinarily have taken place by 
reason of new inventions and improved processes of pro- 
duction. The four authorities named, working independ- 
ently of each other, reached this opinion about thirty years 
ago, and it may be accepted as one of the established facts 
of statistical science. 

The way in which new supplies of gold operate on prices 
will now be considered. The essential quality of gold is 
that it constitutes purchasing power. It is />er se a demand 
for goods. People do not mark up the prices of the things 
they offer for sale merely because new gold mines have been 
discovered, however rich they may be. If a portion of the 
community*^gold miners or others) should find two dollars 
in their pockets where there had been only one dollar 
before, prices would not rise in consequence merely of that 

fact. Tradesmen would ask the same prices 
^rand^* for their wares, laborers would work for the 

same wages as before, buyers would expect 
to receive the same quantities of goods for a* dollar as before. 
But the possession of double the quantity of money by the 
fortunate persons would double their demand for goods, 
and this increase of demand would cause an advance of 
prices. The attempt to supply th*e demand would call for 
more labor and cause an advance of wages. Then the 
advance of wages would enable the wage-earners to improve 
their style of living by buying more goods, and there -would 
be a further advance in prices unless it should be counter- 
acted by new facilities of production and transportation. 

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It was in this way that the new supplies of gold operated 
to cause the advance of both prices and wages in the 
twenty years succeeding the great gold discoveries of Cali- 
fornia and Australia. The community was not made richer 
by using two dollars instead of one to transact a given 
amount of business, but an advantage was given, as Profes- 
sor Cairnes showed at the time, to wage-earners over rentiers 
and others having fixed incomes. The former had steadier 
employment and better pay, and a fairer chance to rise in 
the world, while the latter were obliged to pay higher 
prices for consumable goods without any enlargement of 
their income. 

Another fact- shown by the foregoing statistical tables 
is that the production of gold in the second half of the 
century reached a minimum in the period 1881-1885, the 
average annual output being less than $100,000,000, and 
that soon afterwards an extraordinary increase took place. 
In the last decade, 1891-1900, the production was more 
than twice as great as that of the first decade, 1851-1860. 
Why has not the same effect on prices been noticed as was 
observed after the great output of California and Australia ? 
There has been some advance in prices during recent years, 
which may be fairly attributed to the new 
t^^nldvaSce" supplies of gold. The counteracting forces 
of new inventions and facilities of production 
and transportation, and the bringing of new land under 
cultivation, have been very active and potent during this 
time. Yet it is difficult to escape the conviction that we 
are on the eve of another period of advancing prices, due 
to the great outpour of gold described above, which seems 
likely to continue and increase for some years. 

The world's use of gold in the arts, for jewelry, watch- 
cases, pens, gilding, dentistry, and chemistry, was computed 
by the Mint Bureau at $72,658,500 for the year 1899. 

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The amount of gold coin and bullion in the United 
States available as money has been computed by the 
Bureau of the Mint from year to year since 1873, at 
which time it was set down at $135,000,000. By adding 
the product of the mines and the imports, and deducting 
the exports and the quantity used in the arts as nearly as 
could be ascertained, the Director found the amount on 
hand July i, 1900, to be as follows : 

In the treasury $222,899,773 

National banks 295,121,378 

Private banks and individuals 516,418,113 

Total $1,034,439,264 

The Director has become satisfied, however, that some 
revision of the estimate of the amount in circulation is 
required, and he is now making an investigation of the data 
upon which the conclusions of the Bureau in past years 
have been based. According to computations made by 
Mr. M. L. Muhleman, of the New York Sub-Treasury, 
the amount in the hands of individuals has been over- 
estimated by about $130,000,000.^ Making this correction, 
the amount of gold coin and bullion in the United States 
at the date named was a little more than $900,000,000. 
This cannot be far out of the way. 


The production of gold in the first half of the nineteenth 
century was little more than sufficient to supply the amount 
used in the arts and to make good the losses from abra- 
sion and accident. About the middle of the century there 
was a great increase, due to discoveries of placer mines in 

1 See Mr. Muhleman's article, " The Stock of Gold in the United 
States," in the Political Science Quarterly <t March, 1901. 

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California and Australia. The annual production of the 
world was quadrupled. Ten years later the Comstock lode 
of Nevada began to yield large amounts of the precious 
metals, $350,000,000 having been taken from it in about 
twenty years, 40 per cent of which was gold. 

In 1884 the greatest discovery of gold the world has ever 
known was made in the Transvaal republic of South Africa. 
These mines; although yet in their infancy, have yielded 
$78,000,000 in a single year. Discoveries only second in 
importance to those of South Africa were made in the last 
decade of the century in the Klondike region of Canada, 
in Cripple Creek, Colorado, and in West Australia. 

The world's gold production in the second half of the 
century was nine times as great as during the first half. 
That of the whole century was nearly eight thousand 
millions of dollars. 

The new supplies of the mid-century caused an average 
advance in the prices of commodities of about 20 per cent. 

As gold is purchasing power, new supplies of it constitute 
new demand for goods. Prices rise in consequence ; first, 
in the mining districts, then gradually throughout the civil- 
ized world. The new demand calls for more labor and 
leads to an increase of wages. The wage-earners are ena- 
bled to buy more goods, and this causes a further advance 
of prices. A redistribution of earnings takes place to the 
advantage of the producing classes and to the disadvan- 
tage of those having fixed incomes. Prices of commodities 
follow the law of supply and demand in this case as in 

The new supplies of gold in the last decade of the cen- 
tury appear to have caused an advance of prices, which 
seems likely to be progressive for some years to come. 

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Authorities for Chapters IV and V ^^ 

Jacob's The Precious Metals. 

Cairnes' Essays in Political 'Economy (" The Gold Question "). 

Jevons' '* On the Variation of Prices and the Valuation of the 
Currency since 1787," in iki^ Journal of the Statistical Society of 
London., June, 1865. 

Tooke and Newmarch's History of Prices^ Vol. VI. 

Lock's Gold^ Its Occurrence and Extraction. 

Percy's Metallurgy., Silver and Gold. 

Phillips and Louis' On Ore Deposits. 

Rothwell's Mineral Industry (annual). 

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Sreaking broadly, it may be said that the ancient world 
had the double standard of silver and gold ; that the single 
silver standard prevailed during the Middle Ages, from the 
seventh century to the thirteenth ; that the double standard 
was then reintroduced and prevailed in Europe and America 
till the beginning of the nineteenth century, and that it has 
now been superseded by the single gold standard. 

The gold florin, first coined by the city of Florence about 
the year 1252, was introduced to meet the needs of the 
growing commerce of the Italian republics. The conven- 
ience of gold in making large payments had been observed 
by the crusaders at Byzantium. The idea of a gold cur- 
rency was brought back in this way to Western Europe, 
from which it had disappeared long before in the penury of 
the dark ages. Gold thus became an addition to, not a 
substitute for, silver money, and thus the double standard 
was reestablished. 

The market values of the two metals, gold and silver, are 
subject to the law of supply and demand like other com- 
modities ; they are liable to change of value with reference 
to each other. Sixteen pounds of silver may 

Market Values \yQ worth more than one pound of srold to- 

of the Precious 

Metals. day, and less at another day. One of them 

may be in greater demand in India than in 
England, and so on. There are persons in every com- 
munity (bankers, brokers, and bullion dealers) who seek to 


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make a profit out of these changes by exporting or melting 
coins. Theirs is a perfectly proper vocation, as legitimate 
as the getting of gain from any mercantile transaction, yet 
it has been held in great opprobrium at some periods in 
the world's history, has been treated as a crime, and severe 
laws have been passed to punish persons guilty of it. The 
community was put to inconvenience by finding either gold 
or silver coins growing scarce in the circulation. These 
were called "coins of the realm.'' They were regarded as 
belonging in a peculiar sense to the country whose stamp 
they bore, whereas they were the exclusive property of 
individuals, who had the same right to dispose of them as 
of their sheep or oxen. The enactments in various coun- 
tries against trading in the precious metals, and especially 
against exporting or melting them, form a remarkable 
chapter of human fatuity and folly. It was impossible 
to execute the laws passed for this purpose. A remedy 
for the alternate drains of gold and silver was accordingly 
sought by changing the legal ratio. " In France," says Mr. 
W. A. Shaw,^ " the ratio of gold to silver was changed in a 
single century more than one hundred and fifty times." To ^ 
enumerate all the changes of ratio that took place in Europe 
from the middle of the thirteenth century to the beginning 
of the nineteenth would be a hopeless undertaking. 

The true solution of these difficulties was first reached in 
England. This country had had her share of the loss 
and vexation due to changes of the ratio. 
BneSfd**^* She had also visited cruel punishments on 
individuals for melting and exporting the 
precious metals. All attempts to enforce these foolish laws 
were eventually abandoned, and it came to pass in the reign 
of Charles II that the guinea of gold, although proclaimed 
by royal authority to be the equivalent of 20s, in silver, 

"^History of Currency^ P- Si- 

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passed in trade for 21s., and no attempt was made by the 
government to interfere. The guinea remained as a trade 
coin till the third year of George I (17 17), when another 
proclamation was issued making it legally equal to 21s,, at 
which figure the ratio to silver was about 15^ to i. 

As gold was slightly overrated at the ratio of 15 J, there 
was a tendency to export silver; and for this purpose the 
full-weight coins were selected. So it came about in the 
course of half a century that the only silver coins remaining 
in circulation were those which had been much reduced in 
weight by abrasion or by fraudulent clipping. The evil 
became so intolerable that Parliament, in 1774, passed a 
law providing that silver coin should not be legal tender for 
more than £2^ in one payment, except by weight at the 
rate of 5^-. 2^/. per ounce. It was enacted at the same time 

that gold coins deficient in weight should be 

called in and recoined, and that thereafter 
such coins, if under a certain weight, should not be legal 
tender at all. The restriction of the legal tender of silver 
was to continue two years. The expectation of Parlia- 
ment was that some effectual and permanent steps would 
be taken to deal with the evil of light coins in that inter- 
val, but since nothing was done, the act of 1774 was 
renewed in 1776 for two years more. In I778 it was 
renewed for seven years, and then by repeated renewals it 
was carried forward to 1798. Another clause was now 
added that no more silver should be coined at the mint for 
private persons. 

The significance of this legislation was not perceived at 
the time. It had not been the intention of Parliament to 

establish the single gold standard. The ques- 
step°*^**^^ tion of standard was not under consideration 

at all. What Parliament did in 1774 was: 
(i) to put the gold coin in a state of perfection by recoining 

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the defective pieces and making light coins unavailable in 
payments thereafter; (2) to limit the legal-tender faculty 
of the silver money then in circulation. The mint was still 
open, and anybody could have silver bullion coined into 
money of full weight and full legal tender. But since silver 
was undervalued at the ratio of 15 J, nobody would take it 
to the mint. Thus all the conditions of the single gold 
standard were in practical operation without any fixed inten- 
tion of Parliament to bring it about, or any knowledge that 
it had been done.^ 

It was noticed, however, that the inconveniences of a 
shifting ratio had disappeared. There was plenty of gold 
money for large transactions and of silver 
ado^ttdT"^"^ money for small ones. Although the silver 
coins were deficient in weight, they answered 
the purposes of small change. After the experience of a 
quarter of a century, Parliament and people were convinced 
that the act of 1774, although adopted as a temporary 
measure, ought to be made permanent. Accordingly it 
was made so in 1799. Yet it was not until 18 16 that the 
true philosophy of the step was well enough understood to 
secure its enactment into a settled law. In that year it was 
enacted that the gold coin of the realm, when of full weight, 
should be full legal tender and should be coined for pri- 
vate persons to any amount, and that silver coin should not 
be legal tender for more than 40^-. in one payment, and 
should be coijied only on government account and should 

^ " The fact that a change in the monetary standard of the country, 
while it was in actual process of accomplishment under their eyes, could 
have escaped the recognition of contemporary observers, seems at first 
sight to be of so marvelous a character as to pass the bounds of belief. 
Yet that it was a fact is beyond all question." — Carlile*s Evolution of 
Modern Money^ p. 18. The truth was pointed out by Lord Liverpool 
in 1805 and Mr. Carlile properly calls it " a genuine Stroke of genius " 
on his part. 

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be reduced in weight 6 per cent. This law, which estab- 
lished the single gold standard, remains in force to the 
present day. 

In 1853 the United States followed the example of Great 

Britain, by reducing the weight of its silver coins smaller 

than $1.00 and making them legal tender 

Indprrtugar*''^^' ^""^y ^5.00 in one payment. The states- 
men who passed this law supposed that they 
were adopting the single gold standard, but this was not 
legally accomplished until 1873, as has been explained in 
Chapter III. 

The kingdom of Portugal adopted the single gold standard 
in 1854. 

In the year 1857 the states composing the German Zoll- 
verein and the empire of Austria entered into a monetary 
treaty by which they adopted the single silver 
^r^ny!^""* Standard. The treaty provided that any of 
the contracting states might coin gold crowns 
and half crowns to circulate at their market value. It was 
expressly stipulated that these should not be legal tender. 
They might be received at the public treasuries, however, 
at rates to be fixed by the respective governments at least 
once every six months, but the rate should not be higher 
than the average commercial rate for the preceding six 
months. The official rate might be changed oftener if the 
market rate should make such change necessary. 

It happened at this time that France was importing gold 
and exporting silver on a very large scale. As the market 
ratio was now 15.27 and the legal ratio 15.50, there was a 
profit to bullion dealers of i^ per cent in the traffic. The 
gold crowns of Germany were drawn to Paris as fast as they 
came from the mints, and the country was left with silver 
coins only foi^her domestic trade. These were so bulky 
and inconvenient that they were largely supplanted by 

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issues of bank notes which were subject to varying rates of 

discount in different cities and states. This condition was 

considerably aggravated by the heterogeneous- 
Act of 1871. ^ , -I . r , , 

ness of the silver coins of the several states — 

thalers, marks, florins, gulden, kreutzers, etc. 'There was a 
very general demand for a uniform system of coins; and, 
when the question was brought up for solution after the 
consolidation of the German Empire, it was decided by the 
government to make gold the standard, with a silver sub- 
sidiary currency — in other words, to adopt the English 
system. The first bill for this purpose became a law 
December 4, 1871. It discontinued the coinage of silver 
except for the government. It provided for the comagfespf 
ten-mark pieces of gold (equal to $2.38), of which 139 J- 
should contain one pound of pure metal ; also twenty-mark 
pieces of double the weight ; and all gold coins were made 
unlimited legal tender. For the purpose of settling preex- 
isting contracts and of exchanging gold for silver coins, it 
established the ratio of 15^, which was the market ratio at 
the time. Provision was made for calling in and melting the 
outstanding silver money and exchanging gold for it out of 
the funds in the imperial Treasury — practically the French 
war indemnity. Another law containing further details was 
passed July 9, 1873. This law definitely 
established the gold standard and provided a 
new subsidiary coinage based iipon the silver mark, which 
should be legal tender for only twenty marks in one pay- 
ment. It was provided that the old thalers (three-mark 
pieces) should be full legal tender as long as they should 
remain in circulation. Under the law. for taking in and 
melting the old silver coins upwards of 7,000,000 pounds 
weight of fine silver were sold in the open market between 
1873 and 1879. The price of silver declined 9^. per 
ounce during that time. The sales were then suspended. 

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leaving 339,000 pounds of silver bullion in the Imperial 

An order was issued in the year 1900 to convert the 

residue of bullion into silver subsidiary coins during the 

'next ten years. There are still in circula- 

reasury r er ^^^^ -^^ Germany about 125,000,000 of silver 

thalers, or three-mark pieces, which are full 
legal tender. They occupy the same position as our silver 
dollars and the French five-franc pieces. The Imperial Bank, 
or any other bank in Germany, can pay them out at par in liqui- 
dation of all claims against them. While this condition exists 
Germany cannot be considered strictly on the gold basis. 

There was a brief bimetallist revival in Germany in 
1894-96. It grew out of the low price of grain, which 
was erroneously ascribed by the landowners, or Agrarian 
party, to the demonetization of silver. Chancellor Caprivi 
so far yielded to the demands of this party as to authorize a 
commission to investigate the question. It consisted of six- 
teen members, and it held twenty-one sessions and took 

a large amount of testimony, but came to no 
tauonlnifle^tti. "-esolution whatever. Soon after this com- 

mission came to an end Chancellor Caprivi 
retired from office and was succeeded by Prince Hohenlohe. 
Thereupon the Agrarians in the Reichstag started up afresh 
and on the i6th of February, 1895, prepared a motion asking 
the government to take the initiative in calling a new inter- 
national monetary conference. This motion was supported 
by a large majority of the Reichstag, and the government 
somewhat reluctantly referred it to the Bundesrath, whose 
consent was necessary. Nearly a year was consumed in the 
deliberations of the several states composing the Bund. On 
the 1 6th of February, 1896, Prince Hohenlohe announced 
that the German states had unanimously rejected the motion 
to convoke an international monetary conference. 

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In 1874 Sweden and Norway followed the example of 
Germany by adopting the gold standard, and Holland did 
the same in 1875. 

At the beginning of the nineteenth century France had 
the double standard at the ratio of 15^. This ratio had 
been adopted in 1785, at the instance of 
^TXi^^ Calonne, Comptroller-General. The Revolu- 
tion came on and the monetary system was 
plunged in chaos by issues of irredeemable paper so vast 
that they could only be cleared off by repudiation. Then 
the statesmen of the republic passed the coinage law of 
1803, intending to establish the single standard of silver. 
The law began with a general provision that five grams of 
silver ^^ fine should constitute the monetary unit bearing 
the name of the franc. The measure was before the legis- 
lative body three years. Eight reports were made upon it, 
the point in controversy being the various methods proposed 
for utilizing gold in the currency while making silver the 
sole standard. No decision was ever reached on this point, 
but at the last moment a clause was added to the bill pro- 
viding that gold pieces of 20 francs should be coined at. 
the rate of 155 to the kilogram. Under this law five grams 
of silver would constitute i franc, and five grams of gold 
15^ francs. The debates and reports show that there was 
a general understanding that if the market ratio should 
change so as to make a recoinage necessary, the gold 
should be recoined and the silver franc kept as the invari- 
able measure of value. There was nothing on the subject 
of legal tender in the law, but since all debts were payable 
in francs, and since two kinds of francs were authorized to 
be coined, the law really established the double standard at 
the ratio of 15^, which ratio already existed by virtue of 
the law of 1785. 

It has been frequently asserted that the French law of 

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1803 kept the market ratio of the two metals steady at the 
legal ratio, />., at 15^^, until 1873. This is an entire mis- 
take. There were only six years in the seventy in which 
the market ratio was approximately 15^^. These were 1806, 
1807, 1811, 1820, 1851, and 1867. In 1821 

Did not keep the prold money had nearly disappeared from 

Market Ratio j j rr 

Steady. France and the circulation consisted of silver 

exclusively, and so continued until 185 1, when 
the great outflow of gold from California and Australia 
cheapened that metal, putting the market ratio below 15^. 
The ratio remained below 15^ till 1867. During that inter- 
val France imported gold to the amount of $600,000,000, 
and exported so much of her silver to India that she suffered 
inconvenience for the want of small change. She was com- 
pelled to coin gold pieces as small as five francs. The 
government attempted at first to adopt the English system 
of subsidiary silver coins, limiting their legal-tender faculty 
to fifty francs in one payment. Accordingly in 1864 it 
brought before, the Corps L^gislatif a bill lowering the fine- 
ness of the coins smaller than five francs to T%Viy> ^^^^ 
reducing their value about 7 per cent. The next step taken 
was the formation of the Latin Monetary Union, which will 
be treated in the following chapter. 

Under the treaty of 1857 with the states of the German 
Zollverein the single silver standard prevailed in Austria- 
Hungary, but the currency in actual use was 


irredeemable paper. The monetary unit was 
the silver florin, the normal value of which was 45.3 cents 
of our money. An attempt was made in 1858 to resume 
specie payments. The premium of silver over the paper 
florin then was only i^ per cent. The war of 1859 super- 
vened and led to large issues of irredeemable paper which 
prevented the carrying out of the plan. Again in 1865 a 
new attempt was made for specie resumption, but it was 

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frustrated by the war with Prussia. In 1879, in conse- 
quence of the heavy decline in the price of silver, the 
government gave orders to the mints in both Austria and 
Hungary to receive no more of that metal from private 
individuals for coinage. The effect of this order was to 
make government paper money the standard, and this paper 
varied somewhat from day to day in comparison with gold, 
but it no longer followed the downward course of silver. 

The paper florin was worth in 1879 about 42 
Stendard'hi^SQa ^ents. In 1 892, before the currency reform 

was adopted, it was worth 41 cents. If it 
had kept pace with the decline of silver, it would have 
been worth only 30 cents. Austria had a gold coinage 
at this time, but it was not legal tender. In 1892 she 
decided to resume specie payments in gold. She first 
fixed a ratio at which all paper money and paper obliga- 
tions should be redeemable. The ratio decided upon was 
119 paper to 100 gold, as this had been the average ratio 
prevailing in the market during the thirteen years from 
1879 to 1892. 

The next step taken was to pass a coinage law. The 
krone (crown) of gold was made the monetary unit, con- 
taining 4.7 grains of fine gold, the ten-crown piece being 
worth $2,026 of our money. Silver was to be coined only 
for the government and to be legal tender for fifty crowns. 
The government was authorized to borrow gold sufficient 
to redeem its outstanding notes amounting to 312,000,000 

florins. Gold to the amount of 112,000,000 
^^^^^ florins was borrowed, and this, together with 

some reserves in the Treasury, was applied 
to the purpose of retiring 200,000,000 of the notes. The 
method adopted was not direct redemption. The govern- 
ment deposited the gold in the Austro-Hungarian Bank and 
redeemed its own notes partly with bank notes and partly 

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with new silver money which was needed to replace the 
small notes thus retired. In this way 200,000,000 florins 
of old notes were withdrawn and canceled before the end of 
the year 1897, leaving only 112,000,000 outstanding. When 
this was accomplished the value of the paper florin became 
very nearly equal to gold of the new standard. Laws were 
passed in 1898 for withdrawing the remaining notes and 
for the full resumption of specie payments, but their opera- 
tion has been delayed by political difficulties. The premium 
on gold at Vienna, as indicated by the rate of exchange on 
London, is about one p^r cent. 

After many struggles with the double standard the single 
standard of silver was established in British India in the 
year 1835, the unit of value being the rupee. Prior to 1873 

this coin was worth about is, \o\d,. but was 
British India. 

usually reckoned as the equivalent of 2^., 

or 48 cents, the price of silver being about 60^. per ounce. 
With the gradual growth of commerce the inconvenience of 
silver, on account of its bulk and weight, became oppress- 
ive. Hence as early as 1859 ^^ commercial classes of 
the country began to urge the government to adopt the 
gold standard, with silver as subsidiary, but nothing was 
done until 1893. 

On the 2ist of June, 1892, the government of India trans- 
mitted to the home government a report and plan for cur- 
rency reform prepared by Sir David Barbour, 
G^w sunLd".^ financial secretary of India. In this report 
it was considered impossible to establish in 
India a currency composed entirely of gold, yet the example 
of France and of other countries, which had the gold stand- 
ard but maintained a large circulation of silver of full legal 
tender, pointed to the conclusion that the gold standard 
could be established in India without a large accumulation 
of gold. Sir David avowed himself a bimetallist in principle, 

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but in the event of a failure of the Brussels Monetary 

Conference he thought that an attempt should be made to 

establish the gold standard in India. The government of 

India requested permission to discontinue the coinage of 

silver for private persons. The subject was referred to a 

committee of seven, of which Lord Herschel was chairman. 

The Committee's labors extended over a period of seven 

months. On the 31st of May, 1893, it recommended that 

the request of the government of India for permission to 

close the mints against silver, retaining the right to coin 

rupees on government account, be granted. 

The Herschel In order, however, to guard against any sud- 

Comnilssioii «=»«=» 

of 1893. den and large advance in the value of the 

rupee on account of its scarcity, it was recom- 
mended that the government should announce that it would 
give rupees for gold at the rate of 16 d. per rupee and 
would receive gold for taxes at that rate. The recom- 
mendations of the Committee were approved by the home 
government and were promulgated by the government of 
India on the 26th of June, 1893. The first effect of the 
closing of the Indian mints was a heavy fall in the price 
of silver. The price at the beginning of June, 1893, was 
38f//. per ounce. After the announcement was made it 
fell to 27^//. The price of rupees fell gradually to 13//., 
but rose during the next five years to i6d. As the quan- 
tity of rupees in circulation could not be increased, they 
began to have a "scarcity value." In other words, the 
demand for them, due to the growth of business, exceeded 
the supply, and raised the price to i6d. 

In March, 1898, a committee of thirteen, with Sir Henry 
H. Fowler, M.P., at its head, was appointed by the Anglo- 
Indian government with a view to the completion of the 
policy initiated in 1893. The Committee made a report 
July 7, 1899. It said that it was deemed important to assure 

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the world that India was not to take any backward step from 
the position already assumed. Events had been, on the whole, 

propitious since 1893, the value of the rupee 
of^^s^"^ ^^™°""*^ ^^™S ^^^^^ ^y reason of its scarcity to i6^/. 

and remained stable within the ordinary 
fluctuations of exchange. Inasmuch as the public had 
come to regard 16^. as the par value of the rupee, and 
since business had adjusted itself to that ratio, it was deemed 
best to maintain it. 

Gold was made legal tender in India by Act 22 of 1899, 
at the rate of fifteen rupees to the sovereign. In the budget 
statement issued at Calcutta in March, 1900, it was said that 
the government has accumulated upwards of ;^8, 000,000 in 
gold, and that it intended to retain not less than ;£'5,ooo,- 
000 as a permanent reserve. It is believed that the rupee 
can be maintained at par without any large accumulation of 
gold in the Treasury. 

Prior to 1897 Japan had the double standard in law but 
the single silver standard in practice. She had been under 

the regime of irredeemable paper from 1873 
Mrst^dlrd!"^ to 1886. In the latter year she had resumed 

specie payments in silver. The decline in 
the price of that metal and the consequent disturbance of 
the foreign exchanges induced the government, in 1893, to 
appoint a commission to make inquiries concerning the 
coinage system and the monetary standard. This commis- 
sion remained in session twenty-two months. It made its 
report in July, 1895, a majority of the members recom- 
mending the adoption of the single gold standard. 

The war between China and Japan took place the same 
year, and the Chinese indemnity fund, equal to ;^38,ooo,ooo 
sterling, put in the hands of Japan the means to carry this 
monetary reform into effect with very little delay. It was 
stipulated in the treaty of peace that the indemnity should 

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be paid in London in English money. The law to carry the 
reform into effect was passed in May, 1898. 

At that time the market ratio of silver to gold was about 
32 to I. The gold yen of the old coinage was in circula- 
tion as commercial money and was worth 
age L^w.^"*^" ^^^"^ double the value of the silver yen. It 
was decided to make the gold yen the unit of 
value, and to make it approximately equal to the value of 
the silver yen at that time. For .convenience in reckoning, 
and in order to keep the gold yen of the former coinage in 
circulation, the new yen was given exactly one-half the 
metallic content of the old one. The fineness is nine- 
tenths. The weight of the ten-yen piece is 8.3333 grams, 
and its value is $4.98. The gold pieces authorized to be 
struck at the mint are those of 5, 10, and 20 yen; All 
gold coins were made unlimited legal tender, the old yen 
to circulate at double the value of the new. The gov- 
ernment receives and coins without charge all gold of 
standard fineness brought to the mint at Osaka. 

The coinage of silver for private persons ^ivas discon- 
tinued. It was provided that each silver yen of the old 
coinage should be redeemed with a gold yen of the new 
coinage if presented before July 31, 1898, and after that 
date be regarded as bullion only. The new silver coins 
authorized are pieces of 50 sen, 20 sen, and 10 sen, the sen 
being the hundredth part of a yen. Silver coins are legal 
tender for 10 yen only. There are also small coins of 
nickel and bronze called "rin," which are legal tender for 
one yen. The rin is the tenth part of the sen. 

The coinage law of Japan contains a provision that if, in 
consequence of abrasion from circulation, any of the gold 
coins fall below the minimum circulating weight, the 
government shall exchange such coins for others of the 
same face value without making any charge. In other 

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words, the government insures its gold coins against loss 
by ordinary wear. 

The whole amount of one-yen silver coins redeemed 
under this law was 75,093,822 yen. Of this sum 25,567,011 
was set apart for minting new subsidiary silver coins, and 
the remainder was sold at Hong Kong, Shanghai, and 

Russia suspended the coinage of silver for private indi- 
viduals on the 9th of SepJ;ember, 1876. Prior to that time 
she had had the single silver standard nominally, but had 
been under the regime of irredeemable paper. This paper 
was quoted in terms of gold in all transactions of any mag- 
nitude. In other words, gold was in practice the standard 
of the Russian mercantile classes. The value of the legal- 
tender notes was measured in it from day to 
Gold Sto^^d-^^ day. The gold imperial was in circulation as 
commercial money. Its normal value was 10 
roubles 30 copecks in paper. When the price of silver had 
declined so that 10 roubles 30 copecks of paper would buy 
silver bullion which would yield a greater sum, by coining 
at the mint, the government suspended the free coinage of 
that metal and set its face toward the gold standard. Vari- 
ous steps were taken to this end at different times during 
the succeeding twenty-three years. They culminated in the 
law of June 7 (19), 1899, by which the gold standard was 
definitely adopted. 

It was decreed that the ratio between the old currency 
rouble and the new gold rouble should be as i^ to i, and 
that this rating should apply to all past contracts, public 
and private. A person owing 150 roubles could pay the 
debt with 100 roubles after the resumption of specie pay- 

1 See report on the adoption of the Gold Standard in Japan, by 
Count Matsukata Masayoshi, Minister of Finance, Tokio, 1899. 

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ments, but these would be gold roubles. This act has been' 
severely criticised, as though it were equivalent to repudia- 
tion of one-third of all debts. On the contrary, if the 

single silver standard had remained in force, 
coZs^e^w ^^^ debts would have been scaled down 50 

per cent or more, instead of 33^ per cent. 
A debt of 150 roubles could in that case have been paid 
with 75 gold roubles or less. 

The gold rouble was made the monetary unit of the 
empire, containing 17.424 doli (about 12 grains) of fine 
gold. The smallest gold coin, however, is the five-rouble 
piece, containing 87.12 doli (59.7413 grains) of fine gold. 
Gold pieces of 5, 7^, 10, and 15 roubles are to be struck. 
The fifteen-rouble piece is called the imperial. All gold 
brought to the mint either by the government or by private 
individuals is to be coined. The standard of fineness is ^j^. 
Gold coins are legal tender without limit. Silver and cop- 
per are coined only for the government. Silver roubles and 
half and quarter roubles are legal tender for 25 roubles in 
one payment. Smaller silver and copper coins are legal 
tender for 3 roubles only. The rouble is divided into 100 
copecks. The smallest silver coin is 5 copecks. 

The gold standard prevails also in Rumania, Turkey, and 
Egypt. AH the South American countries except Bolivia 

and Paraguay have adopted it, but most of 
South America. , \ i ,. /. 1 

them are under the regime of irredeemable 

paper. The only countries of importance which have the 

silver standard are China and Mexico. The latter has the 

double standard in law, but the single silver standard in 

practice. The same is true of the Central American states, 

except Costa Rica, which has the gold standard. 

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Inconveniences resulting from the use of two metals as 
standard money have led civilized nations successively to 
demonetize silver and to adopt the single standard of gold. 
These inconveniences were manifested for the most part 
in the exportation of one or the other metal, according as 
the market ratio varied from the legal ratio. The change 
to the single gold standard has come about within the past 
century, and mostly during the past thirty years. One 
reason why gold has been preferred to silver is that it con- 
tains much greater value than silver in a given weight; and 
bulk, being thus akin to a labor-saving machine. 

The demonetization of silver means the discontinuance 
of the coinage of silver bullion deposited at the mint by 
private persons. 

In some countries there still remain large amounts of 
silver in circulation, of full legal tender, such as the thalers 
of Germany, the five-franc pieces of France, and the rupees 
of India. These pieces are usually at par with gold at 
some preexisting ratio, because they are limited in amount 
and are received as the equivalent of gold by the govern- 
ments for taxes. The banks have the legal right to tender 
these silver pieces in payment of checks, and in France and 
Germany they exercise the right at times, in order (as they 
say) to curtail the exportation of gold. In such cases there 
is a small premium on gold in the market. 

A country desiring to pass from the double standard to 
the single gold standard may do so in different ways : 

I. Under favorable circumstances it may do so by merely 
closing the mints against silver. England, France, and the 
United States reached it in that manner and without any 
delay. The favorable circumstances in each case were a 

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relatively large holding of gold, and not more silver than 
could be absorbed by the retail trade of the country. 

2. It may close the mints against silver and wait until 
the coins already in existence acquire a " scarcity value " 
due to the growth of business, causing them to rise to 
equality with gold at some understood ratio. Such was the 
case with India. 

3. It may accumulate a large amount of gold with which 
it may redeem and melt down the whole, or a large part, of 
its silver coins, closing its mints against silver at the same 
time. This was the case with Germany, Austria, Japan, and 


Lord Liverpoors Coins of the Realm, 

Chevalier's Baisse Probable de VOr, 

Shaw's History of Currency. 

Giffen's Case against Bimetallism, 

Carlile's Evolution of Modern Money. 

Papers issued by the Gold Standard Defence Association. 
London, 1898. 

Report and accompanying documents of the United States 
Monetary Commission of 1876. 

Report from the Select Committee on the Depreciation of 
Silver. London, 1876. 

Report of the Royal Commission on Recent Changes in the 
Relative Value of the Precious Metals. London, 1888. 

Report of the Committee appointed to inquire into the Indian 
Currency. London, 1893. 

Report on the adoption of the Gold Standard in Japan, by 
Count Matsukata Masayoshi, Minister of Finance. Tokio, 1899. 

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In the preceding chapter the course of events in France 
was left incomplete because it embraced matters of impor- 
tance that could be best treated under the head of the Latin 
Monetary Union. This Union was formed by a treaty dated 
December 23, 1865, between France, Belgium, Switzerland, 
and Italy. The drainage of silver from those 
snveT^^*** countries following the new discoveries of 

gold in California and Australia had left them 
nearly destitute of small change. All of them, except 
Switzerland, had the double standard at the ratio of 15^^. 
Switzerland had the single silver standard — with the franc 
as the unit — and no gold coinage at all; but the gold 
coins of France had established themselves in her com- 
merce to such an extent that her government in i860 made 
them legal tender. In order to retain her silver small 
change, she had lowered the fineness of all coins smaller 
than five francs to xVrny- '^^^^ was in principle what the 
United States had done in 1853. 

The first overtures for a monetary union to deal with the 
troubles consequent upon the exportation of silver came 
from Belgium. They were accepted by the other countries, 
and the negotiators assembled November 20, 1865. Although 
the object of their meeting was merely to deal with the 

1 For the details embraced in this chapter I am indebted mainly to 
the History of the Latin Monetary Union^ by Professor Henry Parker 
Willis (The University of Chicago Press, 1901). 


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deficiency of small change, some of the members saw plainly 
that the question underlying all others was whether they 
should remain bimetallic or should adopt the single gold 
standard. The three smaller countries strongly advocated 
the gold standard with a silver subsidiary coinage, and 
the French delegates were of the same mind; but the 
French Minister of Finance, M. Fould, insisted on adher- 
ence to the double standard, and his authority was controlling. 
The agreement provided that the countries should form a 
union " as regards the weight, fineness, diameter, and circu- 
lation (between the public treasuries) of their gold and 

silver coins " ; that the gold coins and silver 
SriAuT^ion five-franc pieces of all the countries should be 

identical in everything except their inscrip- 
tions, and should be received in the public treasuries of all ; 
that the fineness of the smaller ^ilver coins should be ^j^^^, 
and that they shoufd be legal tender to the amount of 100 
francs in one payment, and should be redeemed in gold, or 
in silver five-franc pieces, by the treasuries of the countries 
where they were struck, when presented by individuals or 
by the treasuries of the other countries. The gold coins 
and the silver five-franc pieces of each country were to be 
received without limit in the public treasuries of all, but 
there was no provision for redeeming them in anything else. 
Neither was there any clause requiring any of the parties to 
coin either metal ; nor was there a word on the subject of 
legal tender. A provision was added, entibling other states 
to join this monetary union at their own volition, by adopt- 
ing the system and accepting its obligations. The treaty was 
to continue in force fifteen years, and for periods of fifteen 
years each thereafter, unless denounced one year before the 
expiration of any such period. The market ratio of gold, 
and silver at the time was slightly under the legal ratio of i 
to i5h 

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The reason why the French government overruled the 

plenipotentiaries in reference to the adoption of the gold 

standard was political. The Emperor Napoleon III desired 

to extend the prestige of France by securiner 

Barly Mishaps. . j ^ 

the adoption of her monetary system among 

the nations. He was largely under the influence of the Bank 
of France and of the haute finance^ upon which he must rely 
in the event of a war with Prussia, then already in contem- 
plation, and he was, therefore, disposed to be governed by 
it in matters of detail. But it had reaped large profits from 
exchange operations in gold and silver on each oscillation 
of the market ratio above or below the legal ratio. If the 
single gold standard were adopted, this source of profit 
would be cut off. So the plenipotentiaries were not allowed 
to have their way. 

At the outset nothing seemed simpler than a monetary 
union composed of adjacent states whose coinage systems 
were already similar, yet it went wrong almost immediately. 
Italy suspended specie payments within six months. Her 
silver money, including her subsidiary coins, flowed into the 
territory of the other countries, and doubt arose as to 
whether she would be able to redeem the latter. The ques- 
tion of redeeming her five-franc pieces had not yet become 
important. Greece was the only other country that elected 
to join the scheme. This she did in 1868, but her finances 
were in such a confused state that she brought weakness 
rather than strength to the union. 

The next event of importance was the international mone- 
tary conference of 1867, held during the Paris Exposition of 
that year. Nineteen countries, including the 
^1^^867^.''°*^'^°'^ United States, were represented in it. The 
declared object of this conference was to' 
secure uniformity of coinage among civilized nations, but 
the real object was to secure the adhesion of other countries 

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THE LaI-IN monetary UNION 8 1 

to the Latin Union. This end might have been gained but 
for its bimetallic basis. The delegates voted unanimously 
for the monetary system of the Latin Union, provided they 
were not committed to bimetallism. They then voted unani- 
mously, with the exception *of Holland, for the single gold 
standard. French officialism and the haute finance were 
surprised and mortified that the representatives of the entire 
Latin Union, including France herself, had broken their 
leading-strings and voted against bimetallism. 

The action of the conference was not without influence 
upon public opinion. An agitation sprang up for the adop- 
tion of the gold standard, and became so per- 

Movements for sistent that the government was compelled to 
the Gold standard . - . , , 

in France. take notice of it. Not a year passed there- 

after without a commission to examine the 
subject. The fact is very clearly brought out by recent 
writers that, despite the opposition of the great bankers, 
France was moving irresistibly toward the gold standard, 
and would have adopted it before Germany did but for the 
war of 1870. Important testimony on this point is found in 
the Enqutte of 1868, in which the opinions of the Receivers- 
General and the chambers of commerce of the entire nation 
were called for. . Of the responses given, 113 were in favor 
of the gold standard and only 22 for bimetallism. The 
Minister of Finance and the money-changers managed to 
stave off a settlement by referring the question to the 
Conseil Supkrieur de V Agriculture^ du Commerce^ et de P Indus- 
trie^ in December, 1869. This body made a more thorough 
investigation than any of its predecessors and, by a vote 
of 14 against 5, decided in favor of the gold standard ; but 
the report was not finished till late in 1870, when the dis- 
turbed state of public affairs prevented any action upon it. 
ITie report was not published until 1872. Meanwhile it 
was generally believed that the war indemnity imposed by 

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Germany had disabled France from adopting the gold stand- 
ard. This was an erroneous supposition, as subsequent 
events proved. All that needed to be done was to stop 
coining silver, and this remedy could have been applied as 
easily at one time as at another*; but this fact was not self- 
evident. It could be learned only by experiment. 

The year 1873 was an eventful one. The price of silver 

fell below 6od, per ounce. The market ratio of the two 

metals was changing in such a way that silver, in obedience 

to Gresham's Law, was flowing into the countries of the 

Latin Union and gold was flowing out. The 

^l^^V^^t^^ ^^^^^ ^^^^^ ^^s P^^^"S up at the mints of 
Paris and of Brussels, much beyond their 
capacity to coin it. The bulky five-franc pieces were reap- 
pearing in payments with disagreeable frequency. The 
French authorities sought to check the movement in Sep- 
tember, 1873, by a secret mint regulation, limiting the coin- 
age of silver to 250,000 francs per day. Two months later 
the limit was lowered to 150,000 francs, and then the secret 
came out. Of course it did not have a quieting effect on 
the public mind. The Belgian Minister of Finance was 
much distressed by the commercial classes, who insisted 
that, unless something were done to check the inrush of 
silver, there would not be a gold coin left in the kingdom. 
After unnecessary and almost fatal delay, he proposed a 
bill to the legislative body authorizing the government to 
limit or suspend the coinage of silver five-franc pieces till 
January i, 1875. The bill was promptly passed and the 
suspension ordered. 

In November, 1873, Switzerland requested that a new 
convention of the Latin Monetary Union be called, and this 
was agreed to by France, notwithstanding the opposition of 
the money-changers, who were again making large profits. 
The convention assembled at Paris January 8, 1874. All 

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the countries found themselves more or less in a trap. None 
of them could take the steps which self-interest required. 

Belgium and Switzerland wanted complete 
Diia^itifs stoppage of silver coinage. Italy was still 

under suspension of specie payments, but she 
had promised to allow her national bank to coin 60,000,000 
francs of silver as a reserve fund, for which the bullion had 
already been provided. France did not know exactly what 
she wanted, but she knew that she held an immense stock 
of Italian and Belgian silver, whose future required careful 
nursing. Everything pointed toward compromise. 

The result was an agreement to restrict the coinage of 
silver five-franc pieces for the year 1874 to 120,000,000 
francs for all the countries, the proportions for each being 

defined. It was provided that the sum allotted 
mv^^^gt ^^ ^^^ National Bank of Italy should be kept 

under lock and key until after the next meet- 
ing of the Union in January, 1875. The right of admission 
to the Union previously extended to other countries was 
withdrawn, unless granted by the express consent of the 
existing members. Silver was thus practically demonetized, 
although the restriction placed upon its coinage was called 
temporary. The restriction was renewed with some varia- 
tions for each year until 1876, when the French Chambers, 
at the instance of M. L^on Say, the Minister of Finance, 
passed a bill authorizing the government to limit or suspend 
the coinage of silver five-franc pieces by decree. The bill 
was passed on the 5th of August, and the decree of suspen- 
sion was promulgated on the following day and still remains 
in force. 

The international monetary conference of 1878, called at 
the instance of the United States, had no effect upon the 
course of events, but the conference of the Latin Union 
itself in that year was important. The Union would have 

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been dissolved, but for the fact that France was carrying 
a heavy load of Belgian and Italian silver which there was 

no present means of getting rid of. Italy 
More Confusion. ^ , . & o J 

was now taking steps to resume specie pay- 
ments, and the conference addressed itself to the task of 
returning her subsidiary silver and getting pay for it accord- 
ing to the terms of the original agreement. If anybody 
thinks that a monetary union of four or five different coun- 
tries on a bimetallic basis is a simple thing, and easily 
managed, let him read the debates and proceedings of this 
conference, and the various treaties, protocols, declarations, 
and additional acts evolved by it, all relating to this one 
subject of the Italian subsidiary coins. Incidentally the 
fact is here disclosed that one and a half million francs 
of the silver coins of the Papal States had rushed into 
France pell-mell with those of Italy proper, but without any 
redeemer, express or implied. This, however, was only 
a minor mischance. 

The question of redeeming the silver five-franc pieces 
was mooted in the conference of 1878, where it came near 
to producing an explosion. It was the chief bone of 

contention in the next conference, that of 

had reached the determination that each 
country should redeem in gold at par all of its silver 
five-franc pieces, and had even arranged the" time and 
manner of redemption before the conference assembled. 
Italy, although she had showed fight when this plan was 
advanced in 1878, was now ready to support it. She had 
resumed specie payments and was enthusiastic for the gold 
standard. Belgium refused flatly to sanction the proposal, 
and withdrew from the conference when she was outvoted. 
The other countries went on calmly without her, and adopted 
a new treaty, that of 1885. It was provided that the coinage 

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of silver five-franc pieces should be suspended and not 
resumed without unanimous consent; that the legal-tender 
quality should be refused to the five-franc pieces of any 
state not a member of the Union ; and that any state 
renouncing the Union should be held to receive back its 
silver five-franc pieces circulating in the other countries and 
pay their nominal value on demand. As Belgium had 
not formally renounced the Union, although her delegates 
had withdrawn from the conference, these clauses applied 
to her. 

Belgium contended that she had derived no advantage 
from the coinage of five-franc pieces at her mint for private 
persons, and therefore could not be justly called upon to 

redeem them. The others reminded her that 
^ws^di^tonis ^^^ ^^^ ^^^ under any obligation to coin for 

private persons, and that if, by electing to 
do so, a loss had resulted from such coinage, such loss 
ought not to fall upon the other parties to the Union. The 
others had means of coercing her — or, at all events, of dis- 
crediting her in the eyes of the world — by depositing her 
five-franc pieces in the National Bank of Belgium and sell- 
ing bills of exchange drawn against them in the money 
markets of Europe. The bank might pay such bills in silver 
exclusively, but this would damage her credit, for nobody 
would know what a draft on the Bank of Belgium was 
worth at any time. Moreover, all the banks and treasuries 
of the other members* of the Union could refuse to receive 
Belgian five-franc pieces, which would thereupon rush home 
precipitately. Shortly after the treaty of 1885 ^^^ concluded, 
Belgium dispatched M. Pirmez as her plenipotentiary to 
Paris, to treat with the French Ministry instead of the repre- 
sentatives of the Union. In the end she assumed respon- 
sibility for her silver five-franc pieces, but was accorded 
very lenient terms. Actual redemption was indefinitely 

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postponed, but the power now resides with France to call 
upon Belgium to redeem 250,000,000, Italy 270,000,000, 
and Greece 14,000,000 of silver francs. As none of them 
can do so, they cannot withdraw from the Union, even if 
they should desire to. 

The later conferences of 1893 and 1897 teach nothing 
except the impossibility of rehabilitating silver and the 

inconvenience of being obliged to consult 
Conclusion ^^"^ governments besides our own whenever 

we want to issue a few million francs of sub- 
sidiary coin. Any unprejudiced reader will have reached 
the same conclusion as Professor Willis, even before he 
finds it at the end of his book, namely: 

The Latin Union, as an experiment in international monetary 
action, has proved a failure. Its history serves merely to throw 
some light upon the difficulties which are likely to be encountered 
in any international attempt to regulate monetary systems in com- 
mon. From whatever point of view the Latin Union is studied, 
it will be seen that it has resulted only in loss to the countries 

It is worth mention that the gold coins of France are 
current in all the countries of Southern Europe and North- 
ern Africa without any monetary union. 


The Latin Monetary Union was an attempt to establish 
uniform coinage on a bimetallic basis, with concurrent circu- 
lation, by agreement among four European countries adja- 
cent to each other, in which bimetallism already prevailed. 

The Union proved to be an embarrassment to all the 
nations concerned, and ended in the adoption of the single 
gold standard by all of them in succession. This change 

Digitized by VjOOQIC 


was acconiplished by simply discontinuing the coinage of 
silver for private individuals and limiting it to subsidiary 
coins struck on government account. 

After the price of silver had suffered a heavy decline, 
France demanded that all the countries of the Union should 
redeem in gold the five-franc silver pieces that had been 
coined by them, and had been received in the treasuries of 
the others. This was agreed to, but the redemption has 
not yet been enforced. 

The Union still exists, but it has been a source of trouble, 
waste, and loss to all the countries so united, without any 
compensating advantage to any of them. 

Digitized by VjOOQIC 


Three international conferences have been held for the 
purpose of considering the question of the remonetization 
of silver. 

The first was called at the instance of the United States. 
By the act of Congress of February 28, 1878, the President 
was directed to invite the governments of 
TiT^sys!''"*^'^"''^ Europe "to join in a conference to adopt a 
common ratio between gold and silver for the 
purpose of establishing internationally the use of bimetallic 
money, and securing fixity of relative value between those 
metals." The invitation was accordingly issued and was 
accepted by all the great powers of Europe, except Ger- 
many, and by most of the lesser ones. 

The conference assembled in Paris, August 16, 1878, 
under the presidency of the French economist and states- 
man, Leon Say. Mr. W. S. Groesbeck, on behalf of the 
United States, offered two propositions for the considera- 
tion of the conference : (i) That it is not desirable that 
silver be excluded from free coinage in Europe and the 
United States ; (2) that the use of both gold and silver as 
unlimited legal tender may be safely allowed by equalizing 
them at a ratio fixed by international agree- 
pS^p^^^^^*"^'^ ment. Mr. Groesbeck said that that portion 
of the law of 1873, by which the silver dollar 
was made to disappear from the coinage of the United 
States, had been passed through inadvertence rather than 


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intentionally, and that the United States, although desiring 
to restore silver to absolute equality with gold, had been 
compelled to limit the coinage of silver on account of the 
market value of the metals, and also by reason of the action 
of the Latin Union restricting the coinage of silver. 

Mr. Goschen and Mr. Gibbs (Great Britain) inquired what 
was to be understood by the "inadvertence" of the act of 
1873, and whether that act had been passed without debate. 

Mr. Groesbeck replied that " no newspaper or chamber 
of commerce '' had considered or recommended the bill, and 
that several members of Congress had confessed to him that 
they did not know at the time what they were doing. 

Mr. Feer-Herzog (Switzerland) said that the silver dollar 
had disappeared from circulation in the United States long 
before the act of 1873 was passed, and that he had docu- 
ments, which he would lay on the table, showing that the 
section of the law of 1873, by which it was made to disap- 
pear from the coinage of the United States, was not passed by 
inadvertence, but voluntarily and with determination to estab- 
lish the single gold standard, which was in fact, and had for 
a long time been in practice, the standard of the country. 

Mr. Francis A. Walker (United States) said that he him- 
self, although at that time occupying a chair of political 
economy and lecturing on money, was not aware of what 
was being done, and he presumed that the great majority of 
his fellow-citizens were equally ignorant. 

Mr. Pirmez (Belgium) said that the real question before 

the conference was whether the double standard should be 

made universal. His country could not do 

Objections of otherwise than reject such a proposition, 
European Dele- , . ,. , ,,, . 

gates. whose immediate result would be to give 

enormous profit to speculators in the metals 

by withdrawing the one and substituting the other with 

every change of market value. 

Digitized by VjOOQIC 


Mr. Broch (Norway) said that the double standard was a 
delusion and a misnomer ; there was no such thing anywhere. 
Countries having the double standard in law had the gold 
standard in fact to-day and the silver standard to-morrow, 
but the double standard never. Even if all European 
countries could be persuaded to adopt the double standard, 
the influence of India and China w^ould produce incessant 
perturbations and fluctuations by alternate importations and 
exportations of silver. 

Mr. de Thoerner (Russia) believed that it was opposed 
to the very nature of things to endeavor to establish a fixed 
relation between the value of silver and that of gold. 

Mr. Goschen said that England could not adopt the double 
standard, but that she had, nevertheless, so large an interest 
in the question under discussion, through her Indian posses- 
sions, that she could not fail to give her aid and coopera- 
tion in any intelligent movement to arrest the fall of silver. 

The president explained the monetary position of France. 
In closing her mint against silver, the government had no 
intention of moving toward the single gold. 
France" °* Standard. France had about twenty-five hun- 

dred million francs in silver, of which nine 
hundred millions were in the vaults of the Bank. To 
demonetize such a mass and throw it on the market was 
inadmissible. But to hold the mint open to take a further 
indefinite quantity, at the ratio of 15 J to i, especially when 
it was known that Germany had fifteen or seventeen million 
pounds sterling on hand ready to sell, was impossible. 
Hence the attitude of France was that of expectancy. 

At the sixth session the president laid on the table a 
memorandum agreed upon by the European delegates as 
their collective answer to the American proposition. After 
thanking the government of the United States for calling the 
conference, the memorandum declared that the European 

Digitized by VjOOQIC 


delegates recognized (i) that it was necessary to maintain in 

the world the monetary function of silver as well as of gold, 

but that the selection of one or the other, or 
Buropeaji Dele- 
gates pronounce both simultaneously, should be governed by 

against Bimet- the special situation of each state or group of 
allism. or 

States ; (2) that the question of the restric- 
tion of the coinage of silver should equally be left to 
the discretion of each state or group of states ; (3) that 
the differences of opinion which had appeared excluded the 
discussion of the adoption of a common ratio between the 
two metals. The representatives of Italy dissented from 
the conclusions of the other European delegates. 

At the seventh session (August 29), the representatives of 
the United States filed a paper expressing their thanks to 

the European states for accepting their invi- 
Adjournment. x <=» 

tation, but dissenting from that portion of the 

memorandum which refers the question of bimetallism to 
the separate action of each state or group of states. The 
conference then adjourned. 

The second conference was called in the month of Jan- 
uary, 1 88 1, by the governments of France and the United 
States, " to examine and adopt, for the purpose of submit- 
ting the same to the governments represented, 
of ^M?"*^ a plan and a system for the establishment, by 

means of an international agreement, of the 
use of gold and silver as bimetallic money according to a 
settled relative value between those metals.*' Germany par- 
ticipated in this conference. It met at Paris April 19. 
Mr. Magnin, Minister of Finance of the French republic, 
was chosen president ; and a committee was 
undef Debate appointed to draft a questionnaire^ which was 
in substance as follows : " Has the fall of 
silver been hurtful to commerce and to general prosperity ? 
Is it desirable that the relative value of gold and silver 

Digitized by VjOOQIC 


should possess a high degree of stability? Is the fall of 
silver due to increased production or to acts of legislation ? 
If a large group of states should agree to the free coinage 
of gold and silver, of full legal tender, at a uniform ratio, 
would substantial, if not absolute, stability of value be 
obtained ? If so, what measures should be taken to secure • 
such result ? " 

Mr. Cernuschi (France) thought that the prospect of an 
agreement in favor of bimetallism was encouraging. It was 
only necessary to secure the cooperation of England and 
Germany to insure success. England had, indeed, refused 
to join in a bimetallic union, but there was reason to believe 

that she might join at a later period. Ger- 
Mr^^erauschi "^^^^y ^ad shown, through a declaration read 

to the conference, that she could not now 
change her course without great loss and inconvenience. 
He (Mr. Cernuschi) would suggest (but only on his per- 
sonal responsibility) that the loss incurred by Germany in 
changing from the silver to the gold standard, estimated at 
ninety-six million marks, be reimbursed to her by the other 
nations which had bought her silver. These nations, he 
contended, had made a gain, by purchasing the silver of 
Germany, equal to the loss which Germany had incurred in 
selling it, for the silver was worth i to 15 J, if bimetallism 
were put in force, whereas Germany had sold it at i to 1 7 
or 18. 

Mr. Broch (Norway) thought that bimetallism was not 
only impracticable, but undesirable. The substitution of 
gold for silver in Europe and America was not an accident, 

but the natural, logical, and necessary 'result 

of the progress of civilization. There was 
sufficient gold in the world to supply the wants of all the 
civilized races, including those now under the regime of 
paper money. So far from looking upon bimetallism as a 

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thing to be striven for, he thought it was something to be 

Mr. Pierson (the Netherlands) called attention to the 
" limping-standard " countries (ktalon boiteux), meaning by 
this the countries where the coinage of gold 
s^dard^^"^^ is free and the coinage of silver is not free, 
but where old silver coins of unlimited legal 
tender circulate side by side with gold. The Latin Union, 
Germany and Holland, were in this condition, — a condition 
which could not last. The metallic stock of the banks must 
be all of equal goodness. Bank notes must be covered by 
coin having a real, and not an artificial, value. 

Sir Louis Mallet, on behalf of the government of British 

India, said that he was authorized to engage that India 

would continue to keep her mint open to the free coinage of 

silver for a certain definite period, provided, 
British India. , , ,. . , . 

and upon the condition, that a certain number 

of the principal states of the world engage on their part 

to maintain within their territories, during the same period, 

the free coinage of silver, with full legal-tender faculty, in 

the proportion of 1^^ of silver to i of gold. 

Mr. Forssell (Sweden) said that it was vain to talk about 

the sufferings and groans of this country and of that country, 

of this great bank and of that erreat bank, for 

Mr. ForsseU. , ^ t • n- t ^ 1 , 

the want of bimetallism, so long as England 

and Germany refused to be converted. Notwithstanding 

all that had been said about the growth of bimetallic 

opinion in Germany, here was the imperial government 

absolutely inflexible in its adherence to the single gold 

standard. There was not one ray of hope in that quarter. 

England was equally unmoved. Her Indian interests were 

so far inferior to her general interests that there was not the 

smallest prospect of her entering into a bimetallic union. 

Mr. Moret (Spain) moved that the conference adjourn 

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from the 19th of May to the 30th of June, in order that 
delegates who desired to communicate with their govern- 
ments and receive further instructions upon propositions 
formulated in the conference might have the opportunity 
to do so. The motion was adopted. 

The conference reassembled June 30. 

Mr. Thurman (United States), reverting to certain decla- 
rations of Germany and British India, which he read at 

length, said that these propositions required 
Mr. Thurman. ^ . 

France and the United States to keep their 

mints open to the free coinage of silver of unlimited legal 
tender, this being the condition upon which Germany would 
agree to suspend her sales of silver for a definite period of 
time. While the United States would not reject any and 
every proposition which came short of perfect bimetallism, 
he was bound to say that a proposition which would expose 
them to alternate drains of gold and silver, according as the 
one or the other should command a premium in the market, 
would not be acceptable. 

Mr. Fremantle (Great Britain) presented a declaration 
from his government transmitting to the conference a com- 
munication from the Bank of England. This 
Bank of England. . . . rr 

communication was in effect an agreement on 

the part of the Bank to receive silver and issue its notes 
therefor, to the extent of one-fourth of the gold held by the 
Bank in its issue department, as authorized by its charter, 
provided that the mints of other countries would return to 
such rules as would insure the certainty of the conversion of 
gold into silver and of silver into gold. All its notes were 
payable in gold on demand, and it was required by law to 
receive all the gold offered to it in exchange for its notes. 
At the thirteenth session (July 8) Mr. Evarts, in behalf 
of the delegates of France and of the United States, read 
a declaration stating (i) that the depression and great 

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fluctuations of the value of silver relatively to gold are in- 
jurious to commerce and to the general pros- 

Conciusions of peritv, and that the establishment of a fixed 

France and the 

United States. relation of value between them would produce 

most important benefits to the commerce of 
the world ; (2) that a bimetallic convention entered into 
between an important group of states for the free coinage 
of both silver and gold, at a fixed ratio and with full legal- 
tender faculty, would cause and maintain a stability in the 
relative value of the two metals suitable to the interests and 
requirements of commerce ; (3) that any ratio now or lately 
in use by any commercial nation, if so adopted, could be 
maintained, but that the adoption of the ratio of i5|- to i 
would accomplish the object with less disturbance to exist- 
ing monetary systems than any other ratio ; (4) that a con- 
vention which should include England, France, Germany, 
and the United States, with the concurrence of other states 
which this combination would assure, would be adequate to 
produce and maintain throughout th» commercial world the 
relation between the two metals that such convention should 

The president offered a resolution saying that, consider- 
ing the speeches and observations of the delegates and the 

declaration of the several governments, there 
Adjournment. , r 1 1. • 1 1 

was ground for believing that an understand- 
ing might be established between the states which had taken 
part in the conference, but that it was expedient to suspend 
its meetings ; that the monetary situation might, as to some 
states, call for governmental action, and that there was 
reason for giving an opportunity for diplomatic negotiations ; 
therefore the conference should adjourn to April 12, 1882. 
The resolution was adopted. The conference then sepa- 
rated. It did not reassemble at the time fixed, or at any 
other time. 

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The third conference assembled at the city of Brussels 
November 22, 1892, at the invitation of the President of the 

United States, "for the purpose of consider- 
fnceof^itoa"*^'' ^"^ what measures, if any, can be taken to 

increase the use of silver in the currency 
systems of nations." Mr. Montefiore Levi, one of the 
delegates of Belgium, was chosen president. 

Senator Allison presented the plan and programme of 
the United States, in the form of a resolution, " That in the 

opinion of this conference it is desirable that 

Programme of some measures should be found for increasing 

the United 

States. the use of silver m the currency systems of the 

nations." He desired that plans and proposals 
to this end should be presented by delegates from other 
countries, which should have precedence in the discussion, 
but he would nevertheless offer (i) the plan of Mr. Moritz 
Levy in the conference of 1881, (2) the plan of the late 
Dr. A. Soetbeer. Lastly, he would offer the plan prepared by 
the delegates of the United States, — that of international 
bimetallism, or the unrestricted coinage of both gold and 
silver of full debt-paying power, at a common ratio. The 
Levy plan proposed the withdrawal from circulation of all 
gold pieces and all paper money of less denomination than 
20 francs, in order to make room for silver coins or silver 
certificates. The Soetbeer plan embraced the Levy plan, 
with a number of technicalities which it is not necessary to 

Mr. de Rothschild (Great Britain) made a proposal in 
these words: "The American Government are purchasers 

of silver to the extent of 54,000,000 of ounces 
The^Rothschiid yearly, and I would suggest that, on condition 

these purchases were continued, the different 
European powers should combine to make certain yearly 
purchases, say to the extent of about ;^5, 000,000 sterling 

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annually, these purchases to be continued over a period of 
five years at a price not exceeding 43 pence per ounce 
standard, but if silver should rise above that price, the 
purchases for the time being to be immediately suspended." 

A committee of thirteen members was appointed to con- 
sider the proposal submitted by Mr. de Rothschild and such 
other proposals as liad been, or might be, offered. 

December 2 the Committee made its report. The Roths- 
child proposal was first considered. Preliminary to such 
consideration the Committee inquired: (i) whether there 
was any practical means of restricting or regulating the out- 
put of silver, and it came to the conclusion 

The Report on the that there was none ; (2) what was the prob- 
Rothschild Pro- ' \ / ^ 

posai. able future annual production of silver, and 

it received from the delegates of Mexico and 
the United States the opinion that the maximum production 
had already been reached ; (3) what was to be the policy 
of the United States with reference to the purchase of 
silver, and it received from Mr. Cannon the opinion that, 
if some arrangement were not reached by this conference, 
the Silver Purchase Act of 1890 would be repealed ; (4) what 
was the future policy of British India, and it received from 
Sir G. Molesworth the opinion that, failing any definite action 
by this conference, British India would close its mints to 
silver and take steps looking to the adoption of the gold 

Against the Rothschild plan the argument was advanced 
that it was an attempt to interfere with a natural economic 
law, which must sooner or later overcome any artificial 
arrangement, and that it was impossible to set any limit to 
the sacrifices into which the nations might be drawn. In 
the course of the discussion it was ascertained that the 
United States, Mexico, and British India could agree to 
the Rothschild proposal only in the event that the newly 

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bought silver should be used as money. The question was 
then raised how, in case the proposal were adopted, the 
silver should be purchased, whether by a 
ComSttle***" central organization or by each state acting 
separately. Before reaching a decision on this 
point a vote was taken on the question whether the dele- 
gates would recommend the Rothschild plan to their govern- 
ments, if it should be adopted, and it was decided in the 
negative by six yeas to seven nays. A vote was then taken 
on the Moritz Levy plan and it was adopted by a large 
majority, but Sir Charles Fremantle said that he could not 
recommend this plan to the British Government, except in 
connection with the Rothschild plan or some other plan 
supported by a preponderating majority of the great powers. 
December 6, Mr. McCreary, one of the delegates of the 
United States, said that he could not consider the Roths- 
child plan adequate. Mr. de Rothschild said that after the 
important declaration of the delegate of the United States 
he considered it his duty to withdraw his plan. 

Mr. Tirard (France) said that France had no cause to 
complain of the present monetary situation. She was the 
country of all others which had the largest quantity of 
metallic money, both gold and silver. This 
France"*^^" ^^ ^^^ ^^^ ^^ ^^^ minute subdivision of proper- 
ties and employments, which being very small 
were not adapted to the use of bank checks to the same 
extent as countries where industry is more consolidated and 
centralized. The French people, therefore, required a larger 
amount of coin. France had ceased to coin silver because 
she was confronted with an ever-increasing volume of that 
metal. " We ceased to coin it, and I think our course was 
perfectly right." Why should France permit the free coinage 
of silver when she is already amply provided with it ? She 
alone possessed as much as all the other states of Europe 

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put together. The Bank of ^Prance held as much as all the 
other banks together. " Consequently I have the right to 
say that she has quite enough." Still France would perhap^ 
consent to do what was asked .b^ her if those Powers which, 
are wedded to monometallism should decide to adopt, the 
free coinage of silver. He would never advise his govern- 
ment to take that step on other terms. 

Mr. Forssell (Sweden) made a long and very able speech 
against international bimetallism, holding it to be both 
impracticable and undesirable. 

Mr. de Osma (Spain) asked the delegates of the United 
States whether they deemed it necessary to press the discus- 
sion to a point where the doctrinal differences of delegates 
must be expressed in a vote. 

Mr. Allison replied that it was not the purpose of his 
colleagues and himself to press a vote on the main question 
at this time. He appreciated the cordiality of 
f^^nemtir expression of all the delegates. It had been 
proposed to postpone the conference to a 
future day. He hoped that the studies here begun might 
receive the thoughtful attention of the governments during 
the interval. 

Baron de Renzis (Italy) submitted a motion that the 
conference suspend its labors and decide, should the 
governments approve, to meet again on the 30th of May, 
1893. Mr. Allison seconded the motion. This resolution 
was then adopted, and the president declared the confer- 
ence adjourned. It did not reassemble at the time agreed 

In April, 1897, President McKinley appointed three com- 
missioners to visit Europe for the purpose of promoting 
international bimetallism in some form. The commissioners 
were Senator Wolcott of Colorado, Hon. Adlai E. Stevenson 
of Illinois, and Col. C. J. Paine of Massachusetts. They first 

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proceeded to France, where they secured the cooperation 
of M. Meline, the prime minister. They then went to Lon- 
don and opened negotiations with the Sahs- 

Thewoicott bury ministry and secured the promise that, 

Comniissioii of 

1897. in case France and the United States should 

open their mints to the unrestricted coinage 
of silver at the ratio of i5|- to i, they would recommend to 
the government of India the reopening of the mints of that 
country to the coinage of silver and would recommend that 
the Bank of England should keep one-fifth of her metallic 
reserves in silver, as permitted by her charter. The min- 
istry declined to entertain any proposition for modifying the 
single gold standard for the United Kingdom. 

Lord Salisbury and his colleagues did all that they could 
to promote the success of this plan ; but when it was brought 
formally before the government of India, it was rejected. 
It was a plan, said the latter, to introduce unheard-of fluc- 
tuations in the rate of exchange, to throw all business into 
confusion,, to inflict enormous losses upon individuals, and 
to undo all that they had gained since 1893. They said 
that they never could give their assent to it, and they 
implored the government of Great Britain to dismiss it from 
their minds. This reply was wholly unexpected by the 
Salisbury ministry. 

The latter encountered another obstacle not less formi- 
dable. The Bank of England took some action in reference 
to its metallic reserves which was understood to be favor- 
able to silver. Thereupon the committee of 
the London clearing-house bankers met, Sep- 
tember 22, 1897, and passed a resolution "that this meeting 
entirely disapproves of the Bank of England agreeing to 
exercise the option permitted by the Act of 1844, of holding 
one-fifth or any other proportion whatever of silver as reserve 
against the circulation of Bank of England notes.*' A 

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memorial was also drawn up and extensively signed by the 
strongest names in the mercantile and financial circles of 
Great Britain against any tampering with the standard of 
value either in England or in India. The verdict of these 
classes was so strongly adverse to the government's pro- 
posed action that on the 19th of October Lord Salisbury 
formally announced to the American ambassador that Her 
Majesty's Government were unable to accept the proposals 
of the Wolcott commission. Mr. Wolcott, in a speech in the 
Senate on his return, announced the failure of his efforts 
and resigned his place on the commission. 


During the last quarter of the nineteenth century three 
international conferences were held, the declared object of 
whose promoters was to secure the adoption of bimetallism, 
or the double standard, by the nations participating. They 
were held in the years 1878, 188 1, and 1892 respectively. 
The first and the third were called at the instance of the 
United States; the second at the instance of the United 
States and France jointly. All of them failed to agree upon 
any plan to accomplish the object sought. The first essen- 
tial of such an agreement would be to express in figures the 
legal ratio between the two metals, yet none of the confer- 
ences ever progressed so far as to discuss that subject. 
Any considerable deviation of the agreed ratio from the 
market ratio would bring powerful countervailing forces into 
play. If gold, for example, were artificially cheapened, less 
gold would be mined and greater quantities would be used 
in the arts, while the contrary effects would be felt in the 
production and consumption of silver. 

Tile great obstacle to international bimetallism lies in 
the preference of mankind for gold money over silver 

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money. If this preference did not exist, no international 
conference would be needed in order to put silver on an 
equal footing with gold. 

Even the most elaborate system of exchanges through 
banks and clearing houses leaves a residuum of payments 
to be made by the transfer of metal, and here the question 
of weight becomes decisive. A bank which has to receive 
$1,000,000 of metal will always prefer, say 4000 pounds of 
gold, rather than 140,000 pounds of silver. It can afford 
to pay a premium for gold equal to the difference in the cost 
of handling and storing the two masses. The earliest sign 
of a premium on gold, after a bimetallic agreement had 
been made, would render the agreement itself inoperative. 

If we find a movement of civilized mankind going on 
steadily for a hundred years, working out in different coun- 
tries uniform results which commend themselves to succes- 
sive generations, the presumption is that the movement is 

There is little reason to expect that there will ever be 

another international conference to establish bimetallism. 



Report of the International Monetary Conference held in Paris 
in August, 1878. Washington, 1879. 

Proceedings of the International Monetary Conference held in 
Paris in April, May, June, and July, 1881. Cincinnati, 1881. 

Report of the International Monetary Conference held at 
Brussels in 1892. London, 1893. 

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Government paper money is usually a promise to pay 
coined money. Such paper is of several different kinds. 
We shall here consider chiefly the kind which does not 
bear interest, which is payable at no fixed time, and which 
is made legal tender between individuals. 

The first government paper to circulate as money in this 
country was issued by the Colony of Massachusetts in 1690, 
in order to pay soldiers who had returned from an unsuc- 
cessful expedition against Canada. The public treasury 
was empty, and the soldiers could not or would not wait 
for the collection of taxes to meet their demands. The 
General Court accordingly issued ;^4o,ooo in 

First Bills ^jijg ^£ credit which were made receivable for 

01 Credit. 

taxes and exchangeable for any commodities 

in the treasury. These were issued to the soldiers in antici- 
pation of the tax collections ; they were not payable at any 
particular time; they did not bear interest, and they were 
not legal tender. They did not pass for more than twelve or 
fourteen shillings in the pound. The soldiers lost two-fifths 
of their dues. In 1692 the bills were made legal tender in 
all payments and receivable for taxes at 5 per cent better 
than silver and redeemable in silver at the end of twelve 
months. These provisions made them equal to silver. 


■ Digitized by VjOOQIC 


Yet this was a fatal experiment. Its apparent success as 
a means of postponing taxes led to disorders far worse than 
the commodity currency of the earlier period. It spread to 
the other colonies like an epidemic. Nearly all the colonial 
governors were at variance with their legislatures concern- 
ing bills of credit. Acting under instructions of the Lords 
of Trade, they repeatedly vetoed the paper- 

M^her^ountJ^. ™^^^y ^'^^^^' ^^^^ ^^^ legislatures refused 
to provide for the support of the local govern- 
ments. They stopped the salaries of the governors and 
allowed the public buildings and barracks to go to decay. 
This source of irritation against the mother country has 
been grossly neglected by historians in general, but not 
by Mr. Felt, the historian of Massachusetts currency, who 
assigns it its. proper place among the causes which led to 
the separation. 

In South Carolina in 1719 the people deposed the Pro- 
prietors' governor, because he would not assent to bills of 
credit, and the king connived at this act of insubordination 
in order to get the province under his own authority. At 
a later period the legislature of this colony, being at variance 
with the royal governor on the same subject, adjourned 
for three years, making no provision for the support of the 
government meanwhile. The same thing happened in New 
Hampshire. Her representatives for five years preceding 
the year 1736 refused all supplies. New 

And with the Jersey did the same for four years, for the 
Colonial Got- •> J , . , 

emors. same reason. The governors complained to 

the home authorities ; and the latter insisted 

that the colonies should provide a permanent instead of 

an annual support for the local governments, which the 

colonies refused to do because they were not allowed a free 

hand in issuing bills of credit. In almost every case the 

governors were at last worn out and compelled to yield. 

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As Mr. Felt says, " The Briareus of paper money was too 
strong for them." 

Petitions against bills of credit, from the mercantile 
classes in the colonies, and from London merchants at 
last prevailed on Parliament to take action. In 1751 a 

bill was brought forward to* prohibit paper 
^^m^°t* ^^ money in the four New England provinces 

where the trouble was greatest, but before 
it was passed the agents of the colonies managed to get 
exceptions in case of great emergencies and of war. Even 
in these cases the bills were not to be legal tender between* 
individuals. In 1763 Parliament passed another act much 
more stringent, and applicable to all the colonies. 

A pamphlet of 1743^ speaks of the bills of credit in New 
England issued on loan 

to themselves, Members of the Legislature, and to other Bor- 
rowers, their Friends, at easy and fallacious Lays, to be repaid at 
very long Periods ; and by their provincial Laws made a Tender 
in all Contracts, Trade and Business, whereby Currencies, various 
and illegal, have been introduced which from their continued 
and depreciated nature in the Course of many Years have much 
oppressed Widows and Orphans and all other Creditors. 

This writer gives special attention to the colony of Rhode 
Island, which had 

defrauded more in a few years than any the most wicked admin- 
istrations in the several nations of Europe have done in several 
centuries. A contract made 30 years ago for 

Rhode Island an r j^^ sterling in value (that is, silver at Ss. per 
Awful Example. ^ . ^ , ^ , ' . , ^ 

oz.) is at present reduced to a nommal 32^. per 

oz. . . . This expedient of depreciating their Government bills, 

by their Laws made a Tender and Currency, is promoted by the 

1 Quoted in ** A Letter from a Gentleman in Boston to his Friend in 
Connecticut." In the New York Public Library. 

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fraudulent Debtors and desperate part of the Colony in order to 
pay former contracts with a much less value than was contracted 
for, and more especially to defraud British merchants in their out- 
standing debts. The paper-money promoters are the desperate 
and fraudulent, these being vastly the Majority in the colony, 
carrying all elections ; both legislative and executive parts of 
their government are annually elective. Thus Government is 
perverted and become worse than a State of Nature. If by 
chance any of the elected opposes the emission of any of those 
fraudulent bills he is drop'd next election as a professed enemy to 
the Interest of the Colony. . . . This poor small colony, from a 
late exact Perlustration, contains not exceeding 20,000 men, 
women and children, whites, Indians and negroes, have extant 
about ;^4oo,ooo paper money. And of this about three-quarters 
is in the Possession of people of neighboring Colonies. 

" All our paper-money-making legislatures," says the con- 
temporary writer, Dr. Douglass, "have been legislatures of 
debtors, the representatives of people, who for incogitancy, 
idleness, and profuseness have been under the necessity of 
mortgaging their lands." To the same purport writes 
the historian, Hutchinson. 

Thomas Paine has drawn the portrait of the group. 
Writing in 1786, he tells us how the speculators and debtors 
were then working for bills of credit. He says : 

There are a set of men who go about making purchases upon 
credit, and buying estates that they have not wherewithal to pay 

for ; and having done this their next step is to fill 
Testimoi^ of ^^iq newspapers with paragraphs of the scarcity of 

money and the necessity of a paper emission, then 
to have legal tender under the pretense of supporting its credit, 
and when out, to depreciate it as fast as they can, get a deal of it 
for a little price and cheat their creditors ; and this is the concise 
history of paper-money schemes.^ 

1 Writings, Vol. II, p. 178. 

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Usurers were then, as now, unpopular. Any means of 
circumventing them was hailed with satisfaction, and no 
method was more obvious than that of furnishing loans at 

the public treasury to those who could not 
T^asu^™***^ borrow elsewhere, or who wanted to borrow 

at less than the market rates, or who wanted 
to borrow from the colony at low rates in order to lend 
again at high rates. Anybody who had influence could do 
this. In Rhode Island it was the custom of the favored 
ones to sell their privileges. The first issue of bills -of 
credit for a loan was in South Carolina in 17 12. From this 
example, says Bancroft, " the passion for borrowing spread 
like flame on a dry prairie." 

There were three main causes or excuses for the issue of 
bills of credit: (i) war expenses; (2) loans to individuals; 
(3) ordinary expenses of government. There were also 
other minor pretexts. One of the most common ways of 
increasing such issues was the alleged replacement of old 
and worn bills, which often meant an issue so large as to 

leave a margin over for general expenses, and 

BUteofS^.^''^^^^^^^^^^ a very large margin. Thus, of 
;^46,ooo Connecticut bills authorized for this 
purpose between 17 13 and 1732, ;^29,885 went to the pay- 
ment of colony debts. In this case the General Court did 
not wait to see what margin would be left after replacing 
the old and worn bills, but dipped into the reservoir to meet 
current charges. Similarly, Maryland once issued bills of 
credit as a sheer gift to a portion of the inhabitants, — 
"the taxables." 

Reports were made from time to time to the home govern- 
ment, in response to inquiries as to the amount of bills 
outstanding. Often these were ingeniously prepared to 
convey false impressions. To avoid discovery the New 
York Assembly repealed all safeguards against the reissuing 

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of bills of credit that had been redeemed. When the 

governor disallowed the act the treasurer reissued the bills 

nevertheless. The governor so reported to 

False Reports. 

the Lords of Trade, and added that the treas- 
urer refused to let him know the amount of bills outstanding 
when requested to do so. 

In addition to legal-tender acts, there was a great variety 
of laws to compel people to sell their property at the same 
price for bills of credit as for silver. The " debtor class " 
were not satisfied with forcing depreciated paper upon 

creditors for past obligations, but insisted 
Forcini^ Laws. 

that they ought to be able to buy as much 

property with the paper as with specie. Those who had 

been forced to take the paper for past debts naturally joined 

in this demand, and the legislatures agreed with them. 

Hence we find in nearly all the colonies severe penalties on 

those who charged more for their goods, lands, or services in 

bills of credit than in money. In some cases the penalty 

was a fine, in others imprisonment, in others confiscation of 

the property offered. 

The usual course of events where bills of credit were 
issued was as follows : (i) emission ; (2) disappearance of 
specie ; (3) counterfeiting ; (4) wearing out 
Biufof^cre^^^^^ ^^ ^^^^^5 (s) calling in and replacing worn 
and counterfeited issues with new ones; (6) 
extending the time for old ones to run, especially those 
which had been placed on loan*; (7) depreciation ; (8) repudi- 
ation of early issues in part and the emission of others, 
called " new tenor." 

Dr. Douglass says that Massachusetts had at one time 
" old tenor, middle tenor, new tenor first, new tenor second." 
Rhode Island had an indefinite number of tenors. 

In all cases, except where the bills were placed on loan, 
taxes were laid to sink them at some time, near or remote. 

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This was necessary to give them any credit at all, but it 
was very easy to extend the time. Consequently postpone- 
ments were frequent. When Parliament took 
forRedempt^* ^^^^ ^^ ^^^ Subject, it prohibited all extensions 
and deprived the bills of their legal-tender 
character after the allotted time had expired. This was 
regarded as a great grievance. The New York Legislature 
even resolved that bills not tenderable were useless. 

Counterfeiting and wearing out were invariable and very 
trying evils. The former was punishable with death in all 
the colonies except one or two, — Bronson says in all except 
Connecticut, — but, although there were many convictions, 
the extreme penalty was hardly ever enforced. The expul- 
sion of specie which followed after the first emission of 

bills of credit usually left the people without 

small change. Then the practice of halving 

and quiartering the bills came into vogue, and this opened 
a new door to fraud. The counterfeiters halved and 
quartered their own bills and united the parts to the corre- 
sponding parts of genuine ones and sometimes attached the 
half of a five-pound note to the half of a ten. There was, 
indeed, no end to their tricks. Some bills of small denomi- 
nations circulated after they were known to be counterfeit, 
because there was no other small change. 

Worn-out bills likewise were an ever-recurring nuisance. 
All sorts of opprobrious epithets were heaped upon them. 
They were called, in various statutes, old, worn, torn, tat- 
tered, shattered, ragged, mutilated, defaced, obliterated, 
illegible, and "unfit to pass." 

The depreciation of the colonial bills varied in the differ- 
ent colonies. In Massachusetts the maximum depreciation 
was II for I (the standard being "proclamation money"). 
In Connecticut it was 8 for i. In 1763 the value of the New 
Hampshire shilling was a little less than a half- penny; in 

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177 1 it vanished altogether. Rhode Island old-tenor bills 

in 1770 were worth 26 for i. Those of North Carolina were 

10 for I : of South Carolina, 7 for i. The 

bills of the middle colonies were kept within 

reasonable bounds, — a result due mainly to the stubborn- 
ness of their governors in resisting the legislatures and 
keeping the issues of bills within limits. The maximum 
depreciation in New York was only 25 per cent, in com- 
parison with proclamation money. 

The pamphlets and records of the colonial period are 
filled with^ccounts of the distress and demoralization caused 
by depreciated paper made legal tender. As all loans were 
so payable, the accumulations of age and the inheritances 

of orphans dwindled. So, too, did the earn- 
Swindling. . '^^ • , ' ' 

ings of the wage- worker. In order to avoid 
the losses from a depreciating standard of value, resort \yas 
had by workingmen to " store pay," and here they were gen- 
erally cheated. Trustees and executors who had money in 
their hands which belonged to other people, and who saw 
how things were going, often postponed payment on frivo- 
lous pretexts, since each delay enabled them to settle their 
accounts with less value, thus " devouring widows' houses." 

Not only was bad blood stirred up by the 
Mob Law. - , , , 

resistance of the royal governors, but a spirit 

of lawlessness was engendered against the local assemblies 

if they showed a disposition to resist the demands of the 

greenbackers of that day. Even after the Revolution the 

Legislature of New Hampshire was mobbed because it 

refused to issue legal-tender bills. One of the demands of 

Shays' rebellion in Massachusetts was for more paper money. 

In Rhode Island after the Revolution a general 
Repudiation. . . 

system of repudiation of debts, public and 

private, was undertaken and carried through by means of 

legal-tender paper, in spite of the decisions of her courts. 

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Now it may be asked what happened when colonial bills 
of credit were issued as loans to private individuals. What 
the borrowers wanted was circulating capital. They bor- 
rowed the bills in order to spend them for 
l^he^^BiUs. ^^^^^ goods, provisions, building materials, 
labor, etc. The wages they paid to laborers 
were expended for store goods, provisions, etc. ; so we may 
say that the borrowers of the bills of credit aimed to get 
control of the useful things that were on sale in the com- 
munity, and that they succeeded in doing so. Now, whether 
the bills depreciated or not, it is evident that the borrowers 
got an advantage over their neighbors, because they 
obtained control of this circulating capital at lower rates 
than others had to pay. This was precisely the reason 
why they wanted the loan bills to be issued. If they could 
have borrowed at the same rate in the open market, there 
would have been no reason for borrowing from the gov- 
ernment.. But the injustice did not stop there. What- 
ever they took out of the loan market in this way caused a 
scarcity, and a rise of the rate of interest, for other bor- 
rowers. One of the most observing pamphleteers of the 
day tells us that the rate of interest on "natural loans" 
always advanced after a public loan. This was due in part 
to the withdrawal of loanable capital, and in part to the fear 
of lenders that the bills would depreciate in consequence 
of the new emission. Most commonly they did depreciate. 
The borrowers were for the most part land- 
Landovraws^ *** owners. Only two kinds of security were 
allowed by law, land and bullion. Very little 
bullion was ever offered at the loan offices. The land- 
owners controlled the legislative assemblies everywhere. 
Thus the emission of bills of credit on loan was, in effect, 
a conspiracy of needy landowners against the rest of the 

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Most frequently the issue of legal-tender notes has its 
beginning in an emergency of war, when the government 
finds itself unable to meet its obligations with money, or 
hopes to escape paying the rate of interest demanded for 

Such paper is usually put in circulation by the govern- 
ment paying it to its creditors as the equivalent of specie, 
and authorizing them to pay it to their creditors, and so on. 

Such were the conditions under which colonial bills of 
credit were first issued in this country. Afterwards the 
practice of issuing them for the ordinary expenses of govern- 
ment was adopted, and still later the colonies issued such 
bills as loans to private individuals. ^ 

In all cases the bills depreciated more or less. In some 
instances their value fell to zero and they were repudiated 
in whole or in part. In others the depreciated bills were 
followed by fresh issues called "new tenor," which dejpre- 
ciated in like manner, and were succeeded by third and 
fourth " tenors," which took the same downward course. 

This teaches us that a popular government, when once 
started after the ignis fatuus of irredeemable paper, cannot 
readily stop itself. 

The effect of a depreciating currency is similar to that of 
clipped coin. If all the money in the country were metallic, 
if each man, upon receiving a piece, should be privileged 
to shave off one per cent before passing it, and if the law 
required everybody to accept the remainder at its face value, 
the consequences would be like those which followed the 
emission of colonial bills of credit. In the course of time 
the whole coinage would be reduced to a fraction of its 
original weight. If the rulers of the people should then 
decree that the pieces should pass only for their metallic 

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value, and that new coins should be struck at the mint of 
full weight, but that clipping might go on as before, we 
should have old tenor and new tenor just as they had in 
New England in the eighteenth century. 

There is one difference, however, in favor of clipped coin. 
Nobody loses anything by merely holding it. Nobody can 
shave off any part of it except the owner. In the case of 
a depreciating currency, the longer one keeps it the more 
he loses. 

The colonial bills of credit were always made receivable 
for taxes. Generally the laws provided that they should be 
sunk by taxes within a specified time, meaning that they 
should all be taken in by taxation or redeemed with the 
proceeds thereof, within the specified time, and then be 
canceled. If these provisions and promises had been 
adhered to, the disorders in the currency would have been 
much less serious than they were, but the importunity of 
debtors was always influential with the legislative assem- 
blies. In order to postpone payment of their debts to the 
government they persuaded the government to postpone 
payment of its debts to the bill-holders by extending the 
time for redemption and even adding new bills before the 
old ones had been retired. 

If no more bills had been issued than could be sunk by 
taxes within one year, and if the law to this effect had 
been rigidly enforced, the evil consequences would have 
been slight. 


William Douglass' Discourse concerning the Currencies of the 
British Plantations in America. (Republished by the American 
Economic Association, 1897.) 

Palfrey's History of New England. 

Felt's Historical Account of Massachusetts Currency. 

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Hutchinson's History of Massachjiseiis^ 1628 to 1774. 

C. H. J. Douglas' Financial History of Massachusetts^ includ- 
ing catalogue of colonial pamphlets on currency and banking. 
(Columbia College series, 1892.) 

Bronson's Historical Account of Connecticut Currency, 

Arnold's History of the State of Rhode Island and Providence 

Belknap's History of New Hampshire. 

Phillips' Historical Sketches of American Paper Currency. 

Ramsay's History of South Carolina. 

Hickcox's History of Bills of Credit issued by New York from 
i7og to i78g. 

Documents relating to the Colonial History of New York. 

Parker's Taxes and Money in New Jersey before the Revolution. 

Bullock's Essays on the Monetary History of the United States 

A. McFarland Davis' Currency and Banking in the Province 
of Massachusetts Bay (American Economic Association, 1900). 

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Bad as the colonial bills of credit were, those of the Revo- 
lutionary period were worse. Our ancestors went to war 
without any preparation. They had no money. They had 
no system of taxation. They had no central authority 
capable of enacting and enforcing one, and — what was even 
worse — they objected to being taxed either by Great Britain 
or by their own local governments. All the separate colo- 
nies began to issue bills of credit, even before the Continental 
Congress assembled. 

Nevertheless, the experience of the past had not been 
wholly forgotten. Even Franklin, who had been an advo- 
cate of government paper in earlier times, now recoiled. 
When the first paper money was proposed in the Conti- 
nental Congress (June, 1775) he urged that 
^^^^'* the bills should bear interest, in order to pre- 

vent depreciation. When the second issue . 
was proposed, he urged that Congress should borrow on 
interest the bills already authorized. Both of these plans 
were rejected. The third issue bore interest, and now 
Franklin urged that the interest should be payable in "hard 
dollars." This was voted to be impracticable. 

There was much confusion of ideas concerning details. 

While taking time to consider them, it was voted in July, 

1775, to issue due bills for two million Span- 
First Issues. . , Mt , 1 ,1 1 11 • r 

ish milled dollars, to be sunk by taxes m four 
successive years, beginning November 30, 1779, the taxes 


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to be levied and collected by the states in proportion to 
their population. The bills were not legal tender. The 
Congress had no power to make them legal tender, but in 
January, 1777, it recommended that the states should do so ; 
and this they did, one after another, in one way or another. 
Before the two millions were issued, another million was 
wanted and was authorized, together with three millions 
more before the end of the year. Nine millions more, or 
fifteen in all, were out before independence was declared. 
This was called " continental " currency, to distinguish it 
from the issues of the separate states. 

From this time the demon of "fiat money" had posses- 
sion of the country and worked its will on the inhabitants. 
The issues ran on, in an increasing volume, till they 
amounted to two hundred and forty-two million dollars in 
the year 1779. In 1781 the whole mass became worthless. 

On this subject the essays of Pelatiah Web- 
Pelatiah Webster. , 

ster have become classic. Mr. Webster was 

a merchant of Philadelphia and an ardent patriot. He 
wrote while the paper-money experiment was going on. 
We can readily believe him when he says : " We have 
suffered more from this than from every other cause of 
calamity ; it has killed more men, pervaded and corrupted 
the choicest interests of our country more, and done 
more injustice than even the arms and artifices of our 

In his first essay (October 5, 1776) Mr. Webster says 

that he cannot discern any depreciation as yet, or any 

advance in the prices of goods beyond what a state of war 

would occasion, even if the currency consisted 

Barty Deprecia- ^^ ^^^^ ^^^ ^jj^^^. exclusively. On the other 

hand. Professor Sumner has collected evidence 
showing that at some places goods were sold at lower prices 
for silver than for bills, even before the Declaration was 

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signed.^ It is certain that committees were at work early 
in 1776 attending to the cases of persons who discriminated 
against paper money. The most common punishment for 
this offense was seizing 3ome portion of the offender's goods 
and declaring him an enemy of his country. That this was 
no trifling penalty is attested by the fact that nearly every 
one recanted and prortiised amendment. Nevertheless the 
number of offenders increased continually. In Philadel- 
phia, in the latter part of 1776, one of the penalties was the 
closing of the shops of the guilty parties. This caused 
prices to rise by giving a monopoly to the others ; and so, 
when this effect was observed, the first culprits were allowed 
to reopen. 

Early in 1777 the depreciation had become too great to 
be ignored. Committees were appointed in nearly all the 
states to prevent engrossing and forestalling.^ One way to 
do this was to buy all the goods of a particular kind in sight 
for the army and to require the owners to accept continental 
money for it. This involved the necessity of deciding how 
much the owners were entitled to retain for their own use 
or to meet engagements previously made. It was necessary 
also to fix the rate of wages of labor for reproducing the 
goods. At a later period the depreciation was so rapid that 
Professor Sumner says a man might lose his whole wages 
while earning them. 

Price conventions were the next resort. The first one, 
held at Providence, was composed of delegates from the 
four New England states. It fixed the prices at which 

1 There are several histories of the continental currency. That of 
Professor Sumner, in his Financier and Finances of the American Revo- 
lution^ is much the best. Mr. A. S. Bolles, in his Financial History of 
the United States, has been an industrious collector of facts. 

2 Forestalling is buying goods before they reach the market, in order 
to sell them at a higher price. Engrossing is the same as monopolizing, 


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imported goods might be sold, but an exception was made 
of arms and ammunition in order to encourage their im- 
portation. Retailers were not to charge more 

Price conven- than 20 per cent advance. The reerulation of 

tion in Kew . r , 

England. prices of domestic products was left to the 

states, as was also the penalty for over-charg- 
ing. Rhode Island enacted, in addition to other penalties, 
that if anybody withheld from sale any goods required for 
the army or navy, the state officers might seize them and, 
if necessary, break open buildings. A little later it was 
enacted that buildings containing any goods needed by the 
community and withheld by the owners might be broken 
open and the contents sold at the statutory prices. An 
exception was made of salt, as being, like arms and ammu; 
nition, an indispensable article. The effect of these laws 

was to discourage importation. Nobody would 
Burglary legal- j^^^ j^g in goods to be exposed to legal pillage^ 

Accordingly the Rhode Island laws against 
engrossing were repealed after a few months. The course 
of proceedings in Connecticut was substantially the same. 
This state, however, had a law to prohibit persons from buy- 
ing any more goods than the selectmen should judge to be 
necessary for the use of their respective families. Anything 
like prudence in laying in supplies was thus forbidden. 

A price convention of the six Middle States was held at 
York, Pa., in March, 1777, but was unable to agree upon a 

single point Three states voted that maxi- 

Price Convention ^lum prices should be fixed, that sales by 
of the Middle . , , , , r , • , , 1 . • 

States. auction should be forbidden, and that impor- 

tation (which had fallen off, in consequence 
of the disorderly proceedings of committees) should be 
encouraged by bounties. Three voted against these propo- 
sitions, believing that they would only aggravate the evils. 
The subject was accordingly referred back to the states, 

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but the execution of the price-limiting laws was oftener 
carried out by mobs than by the constituted authorities. In 
Albany two persons who had sold rum for more than the 
established price were taken to the market place and put 
on a scaffold, when they fell on their knees, acknowledged 
themselves guilty, and promised to observe the law and help 
to enforce it upon others. Every method of evasion, such 
as trade by barter, subjected persons to suspicion. Thus, 
Richard Henry Lee, who commuted his rents to payment in 
produce, was denounced as a Tory and left out of Congress 
at the next election. 

Mr. Webster, in one of his essays, said that not more 
than one man in ten thousand was capable of understanding 
the subject. The greatest man of the period did not under- 
stand it; for Washington wrote to Reed, the president of 
Pennsylvania, December 12, 1778, commend- 

^st'^^ws!' ^"g ^'^ ^^^1 "^^ bringing those murderers of 
our cause, the monopolizers, forestallers, and 
engrossers, to condign punishment. It is much to be 
lamented," he continued, "that each state, long ere this, 
has not hunted them down as pests to society and the 
greatest enemies we have to the happiness of America. I 
would to God that some one of the more atrocious in each 
state was hung in gibbets upon a gallows five times as high 
as the one prepared by Haman." Yet he had written, more 
than a year earlier (September 28, 1777), to John Parke 
Custis, directing him to see that the rent of certain land 
and slaves should be so arranged that the payments should 
have a value relative to the currency. " I do not mean by 
this," he says, "that I am unwilling to receive the paper 
money. On the contrary, I shall with cheerfulness receive 
payment in an3rthing that has currency at the time of pay- 
ment, but of equal value then to the intrinsic worth at the 
time of fixing the rent." Only two months before he wrote 

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to Reed about hanging monopolizers, forestallers, and 
engrossers, he wrote (October lo, 1778) to Custis, advis- 
ing him not to accept money for a piece of land he was 
about to sell, but to take other land in exchange for it, 
because the money might lose its value. This was just what 
the monopolizers, forestallers, and engrossers apprehended. 

Washington was an honest man. It never occurred to 
him that he was doing with his land and slaves exactly what 
the others were doing with their provisions and store goods. 
But, a year later, his eyes were wide open. In August, 1779, 
he wrote to his agent, Lund Washington, that he would no 
longer accept continental money on contracts made before 
the war, unless other people did the same, 
ch^nged!"^^ "The law," he says, "undoubtedly was well 
designed. It was intended to stamp a value 
upon, and to give a free circulation to the paper bills of 
credit, but it never was nor could have been intended to 
make a man take a shilling or sixpence in the pound for a 
just debt, which the debtor is well able to pay, and thereby 
involve himself in ruin.'* 

When the Father of his Country could make such mistakes, 
we need not wonder that the common people were befogged. 
Washington here says that it was merely intended by Con- 
gress to " stamp a value " upon certain pieces of paper. If 
value can be stamped upon paper, it is obviously useless to 
work for a living. All that is required to insure plenty and 
prosperity is to pass a law, and then set a few printing 
presses at work. If Congress attempts to stamp a value 
upon a thing that is intrinsically worthless and fails in the 
attempt, its intentions may form a subject of curious interest, 
but they are of no practical importance. 

After the Revolution and to the end of his life, Washing- 
ton was an inflexible opponent of bills of credit, and he had 
need to use all his influence against that form of debauchery 
in Virginia. 

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With the mass of the people nothing could be done. All 
of them, the wise and unwise together, were hurrying to a 

The fatal error (says Pelatiah Webster), that the credit and 

currency of the continental money could be kept up and supported 

by acts of compulsion, entered so deep into the 

The Final mind of Congress and all departments of adminis- 

Cataclysm. . , i , f . j . 

tration through the states that no considerations 

of justice, religion, or policy, or even experience of its utter ineffi- 
ciency could eradicate it. It seemed to be a kind of obstinate 
delirium, totally deaf to every argument drawn from justice and 
right, from its natural tendency and mischief, from common sense 
and even common safety. This ruinous principle was continued 
in practice foJ- five successive years, and appeared in all shapes 
and forms, i.e.^ in tender acts, in limitations of prices, in awful 
and threatening declarations, in penal laws with dreadful and 
ruinous punishments, and in every other way that could be 
devised, and all executed with a relentless severity, by the high- 
est authorities then in being, viz.^ by Congress, by assemblies 
and conventions of the states, by committees of inspection (whose 
powers in those days were nearly sovereign), and even by military 
force ; and though men of all descriptions stood trembling before 
this monster of force, without daring to lift a hand against it, 
during all this period, yet its unrestrained energy ever proved 
ineffectual to its purposes, but in every instance increased the 
evils it was designed to remedy, and destroyed the benefits it was 
intended to promote ; at best, its utmost effect was like that of 
water sprinkled on a blacksmith's forge, which indeed deadens 
the flame for a moment, but never fails to increase the heat and 
fol-ce of the internal fire. Many thousand families of full and 
easy fortune were ruined by these fatal measures, and lie in ruins 
to this day, without the least benefit to the country, or to the great 
and noble cause in which we were then engaged. 

When the price conventions failed of their object, new 
ones were held fixing new limits, — as, for example, fourfold 

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the prices of 1774, then eightfold, then tenfold, then twenty- 
fold, — terrorism being applied in each case to enforce the 
decrees. Country folks accused town folks of extortion, 
and threatened to come in and take what they wanted by 
force. Town folks accused country folks of withholding their 
produce. Laws were enacted against withholders. Anony- 
mous handbills and broadsides were circulated, threatening 

vengeance on merchants. Turmoil was every- 
Social Terrorism. , _,. ... . ^-r,,. 

where. Society was like a train of Eskimo 

dogs when the driver hits with the whip the leader, which 

turns and falls upon the dog behind him, and presently the 

whole pack are piled together in battle, not one knowing 

what it is all about. As a result of such irrational business 

disturbances Boston was, in October, 1779, on the verge of 

starvation; money transactions had nearly ceased, and 

business was done by barter. 

In May, 1779, two regiments of Connecticut troops 

revolted on account of their bad pay. In January, 1781, 

the Pennsylvania line broke into mutiny for 

Mutiny of Soldiers. , 1 , .n , .... 

the same reason and killed a captain who tried 

to bring them to submission. A soldier's pay had dropped 

by depreciation from $7.00 per month to 33 cents, although 

it had been twice raised by Congress. Washington could 

not move his soldiers to Yorktown till Robert Morris had 

borrowed hard money from Rochambeau for their back pay. 

In March, 1780, Congress tried the colonial experiment 

of " new tenor " in a very awkward and roundabout way, 

and declared old tenor to be worth 40 for i, the actual 

depreciation being 60 for i. As it was sup- 
**Kew Tenor." jt o r 

posed that $200,000,000 of continental money 

was now out, this was a repudiation of all but $5,000,000 of 

it. The depreciation then went on more rapidly than 

before. The new-tenor bills started at a depreciation of 2 

for I, which became 3 for i before they reached the army 

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and dropped to 6 for i in a few months. Old tenor went at 

a galloping pace down to 500 for i in Philadelphia, when it 

ceased to circulate. In the remoter districts of the South 

it continued in circulation nearly a year longer, and until 

the depreciation had reached 1000 for i. The Southern 

people, when they learned that they had been using the 

stuff long after it had become worthless in the North, thought 

that they had been cheated by the Yankees, thus intensifying 

the sectional distrust which was already so dangerous. 

Counterfeiters had been at work all the time and with 

so much success that Congress was obliged to call in the 

entire issues of certain dates and declare them 
Counterfeiting . 

uncurrent after a fixed period. The issues 

thus branded fell 25 per cent as compared with those not 
branded. Still, counterfeiting only hastened the impending 
crisis, and in that respect it was a public advantage ; for, 
as soon as paper money was dead, hard money sprang to 
life, and was abundant for all purposes. Much had been 
hoarded and much more had been brought in by the French 
and English armies and navies. 

When the paper had become clearly unmanageable, early 
in 1779, Congress bethought itself of specific supplies as 
a means of feeding the army. Under this plan requisitions 
were made upon the states for beef, pork, 
^enflc Sup- flour, corn, forage, etc. Contrary to expecta- 
tion, this was found to be the worst device of 
all, since it called for a vast new system of transportation, 
warehousing, and accountability, and opened the door to 
innumerable frauds. Robert Morris, the Superintendent of 
Finance, protested against it in the beginning as the most 
wasteful method of supplying the army, but his protest was 
unheeded. Nothing would open the eyes of Congress but 
an experiment. Instantly there was a tangle of the public 
accounts which nobody could unravel. In some cases flour 

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collected for the army was not forwarded because there was 
no money to pay teamsters, but it remained at the place of 
collection till it was spoiled. Other consignments which 
were actually sent arrived too early or too late and were 
left on the ground exposed to the weather. Cattle forwarded 
for beef were allowed to wander away. Collections were 

made and not reported. In August, 1780, 
FaSure^***^ Washington was obliged to send word to a 

body of militia, who were about to march to 
his aid, not to come, because he could not feed them. Com- 
municating this fact to Congress, he said, "The present 
mode of obtaining supplies is the most uncertain, expen- 
sive, and injurious that could be devised." He said that 
it had made impressment necessary, and that impressment 
could not last long. Many of General Greene's soldiers 
could not leave their tents because they had no clothes. This 
experiment of specific supplies was an attempt to carry on 
government without any medium of exchange. It was a 
complete failure. 

Impressment, somewhat disguised, had been resorted to 
from the time when continental money began to depreciate. 
To seize a man's goods and tender him irredeemable paper, 

at a rate which would not enable him to 
Impressments. , , , n - r 1 

' replace the goods, was confiscation of the 

difference between the value of paper and that of specie. 
All the price conventions were, in fact, impressment con- 
ventions under another name. Congress recommended the 
impressment of horses and wagons " at a reasonable rate " 
as early as 1775. This method of securing supplies was not 
unknown to the colonies. New York had resorted to it in 
the old French wars, and South Carolina in her Indian wars. 
Lists of articles impressed, with the prices attached, are of 
frequent occurrence in colonial statutes. These, however, 
implied payment in full measure, not long deferred. 

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When the continental money began to depreciate rapidly, 
impressments became more frequent. In Pennsylvania so 
many horses and wagons were impressed that the country 
people stopped bringing fuel to the towns. This led to an 
exception, by the Council of Safety, of teams engaged in 
hauling wood or provisions. In Virginia impressments were 
so numerous that the people sent their teams over the 

mountains or into North Carolina for safety. 
Also a Failure. _ , , • r • , , • , 

Others made a practice of removing and hid- 
ing a wheel or some other indispensable part of a wagon, so 
that it might be useless when the impressing officers came. 
When Washington arrived in camp at Yorktown, ample 
supplies of bacon had been collected and stored for the 
army, south of the James River, but they could not be 
moved because the impressing officers could not find any 
teams to haul them, in the oldest settled part of America. 
Teamsters who had been impressed threw out their loads 
• at the wrong places. Others ran away with them and did 
not return. Hamilton wrote to Greene that public credit 
was so totally lost that nobody would furnish aid, even in 
the face of impending ruin. All this was at the very crisis 
of the war, while the fleet of De Grasse was sailing into 
Chesapeake Bay. But for that fortunate conjuncture the 
war could not have been continued, so greatly had the 
people been alienated by bad money and the harsh treat- 
ment which it led to. 

In May, 1781, Congress recommended that the states 
should repeal their legal-tender laws. Some of them had 
already done so, and now the rest followed 
Deprecation »' ^^^^' ^^^ ^^ them adopted "scales of depre- 
ciation " for the settlement of debts. These 
were tables showing how much the money was worth in 
specie at various times and how disputed accounts should 
be settled. The tables were notoriously incorrect. The one 

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recommended by Congress placed the currency at par in 
September, 1777, whereas it was worth at that time only 33 
cents on the dollar. New confusion and new wrongs were 
introduced by the new policy. " The courts could not do 
justice," says Professor Sumner, " because depreciation 
introduced a fraud into the very essence of the case, and 
the agent of the fraud was almost always innocent, so far as 
his intention was concerned. If, therefore, the court under- 
took to release the victim of the fraud from all effect of the 
fraud, the injury was simply thrown back on the perpetrator, 
who, being innocent, suffered as much wrong as the victim 
would have suffered if nothing had been done." 

Continental money was now an object of execration and 

afterwards of derision. " Not worth a continental " became 

a synonym for absolute worthlessness. In 

continl^teL- ^^^ ^^^ ^^ Congress approved August 4, i79o» 

authority was granted for funding the bills in 

6 per cent bonds *^at the rate of one hundred dollars in 

the said bills for one dollar in specie." Only $7,000,000 

turned up to take advantage of this provision. 

When the final catastrophe came, some of the wise men 

of the period exclaimed that the continental money was 

simply a form of taxation, and that it had been paid and 

canceled. Franklin consoled himself with 

Continental ^^ig idea, saying that the bills clothed and 

Money consid- , , , , , 1 . ^ 

eredasaTax. fed the army and that they operated as a tax, 

bearing most heavily on the rich, as was 
proper, since the rich had the most money. Strange that 
so great a man could have been so deceived ! If the con- 
tinental money was a tax, it did not bear heaviest upon those 
who had the most, but upon those who kept it longest. 
Those who had money due them at fixed times and could 
not hasten the payment were taxeii, not in proportion to 
their wealth, but in proportion to the time the debts had to 

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run. All who depended upon regular interest payments — 
and most of the charitable and educational institutions of 
the day were in this category — were taxed at various rates 
up to 97^ per cent of their entire income. It is a complete 
subversion of ideas to call this a tax. 

The word " tax " is from the Latin taxare, to value or to 
appraise. It presumes a methodical arrangement of the 
taxable persons so that justice shall be done and each shall 
know what he has to pay. Taxation is the opposite of con- 
fiscation. It was adopted in order that confiscation might 
be avoided. Confiscation, however, has the 
c^r^as^coniis- ^^^j^ ^^ enabling the government and people 
to know how much has been taken, and from 
whom, so that when more propitious times come, or a higher 
sense of justice prevails, restitution may be made. The 
kind of confiscation or taxation that continental money pro- 
duced was hurly-burly. The government plundered right 
and left, and, instead of keeping an account of persons and 
things, it told the victims to rob the next ones they came to. 

A euphemism which still lingers is that "the continental 
money fell gently asleep in the arms of its last possessor." 
A truer figure of speech would be that it passed out of the 
world like a victim of delirium tremens. 

It may be asked what else could have been done. If the 
continental money was a disguised tax, certainly an undis- 
guised one would have been better. What the government 
required was army supplies. These were partly the products 
of the country and partly imported, the latter being paid 

for with the products of the country. The 
The Alternative. 

people did not avoid the necessity of parting 

with their products by the device of issuing paper money. 

Except what was borrowed and begged abroad, the whole 

cost of the war was paid by the thirteen states out of their 

annual produce. Therefore it was a question merely of 

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how the contributions should be levied. Regular taxation 
is always better than confiscation, because it is more eco- 
nomical and because it conserves the public morals, the 
confidence of the citizens in their own government, and 
the respect of the world. 

One of the striking phenomena of the Revolution was 

the great display of luxury. Franklin wrote in 1779 : "The 

extravagant luxury of our country in the 

Display of midst of all its distresses is to me amazing." 

Luxury during . , . -r-. ^ /. 

the War. Another writer says : " Every form of waste- 

fulness and extravagance prevailed in town 
and country, nowhere more than in Philadelphia under the 
very eyes of Congress, — luxury of dress, luxury of equipage, 
luxury of the table.*' ^ 

This is not hard to understand. If a man owed $1000 
gold value and was enabled to pay it with $100, he had 
$900 disposable for other purposes. As this money had 
not come by hard labor, he would naturally be somewhat 
free in spending it. He would give good dinners, drive fast 
horses, and buy fine clothes and jewelry for his family. It 
was the transfer of property from frugal persons to spend- 
thrifts. While it continued, itjgave a deceitful appearance 
of prosperity. Like conditions prevailed during the Civil 
War, both North and South.' 

After the war seven states (Rhode Island, New York, 
New Jersey, Pennsylvania, the Carolinas, and 
tiona^^BUi^^^ Georgia) plunged into paper-money debauch- 
ery afresh. There were also severe struggles 
over the question in New Hampshire, Massachusetts, Mary- 
land, and Virginia.^ 

1 Greene's Historical View of the American Revolution. 

2 See the first volume of McMasters' History of the People of the 
United Statesy where these movements are well described. 

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The Revolutionary bills of credit were of the same gen- 
eral character as the colonial bills which preceded them, 
except that they were issued only for war purposes. 

To prevent depreciation it was deemed necessary to fix 
the prices of merchandise by law and to punish persons 
who should sell at higher prices for paper than for silver. 
Severe punishments were inflicted for this offense, but they 
did not stop or even retard the depreciation. 

The bills eventually became worthless and were repudiated. 

Many of the most patriotic families of that day were ruined 
by the use of these bills, without any benefit to the public 


Pelatiah Webster's Political Essays. 

Sumner's Financier and Finances of the American Revolution. 
Bronson's Connecticut Currency^ Continental Money and the 
Finances of the Revolution, 

Bolles' Financial History of the United States. 

Ramsay's History of the American Revolution. 

Hildreth's History of the United States. 

Bancroft's History of the United States. 

McM asters' History of the People of the United States. 

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During the War of 1812 the government of the United 

States issued Treasury notes to the amount of $36,680,794. 

All except $3,392,994 were payable to order and payable at 

a definite time and bore interest at the rate of 5f per cent. 

About two-thirds of them were of denomina- 

Treasury Kotes tions of $ I GO or more. They did not become 

before the Civil _ . ... ,. 

'^ar. a part of the circulatmg medium and were 

not intended to. They ^re paid to such 
creditors of the government as were wilfing to receive them, 
and they were generally at par until specie payments were 
suspended in September, 18 14. On November 12, 18 14, 
Mr. Hall, a member of Congress from Georgia, introduced 
a bill in the House for an issue of Treasury notes to be 
legal tender. The House, by a vote of 42 to 95, and with- 
out debate, refused to consider this bill. No other attempt 
was made to pass a legal-tender bill until 1862. 

In the panic and crisis of 1837-43, during a portion of 
which time specie payments were suspended, the govern- 
ment issued Treasury notes to the amount .of $47,000,000 
to meet deficiencies of revenue. All of these notes bore 
interest and were payable at a fixed time. They did not 
become a part of the circulating medium. A few were 
issued by the Secretary of the Treasury in 1842 bearing 
only a nominal rate of interest (one mill per $100 per 
annum). Such notes had not been contemplated by Con- 
gress. The Committee of Ways and Means of the House, to 


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whom the subject was referred, reported that the Secretary 
had exceeded his authority, but Congress took no action on 
the report. It was the opinion of the Committee that these 
notes were " bills of credit " within the meaning of the Con- 
stitution and that Congress had no power to issue bills of 
credit. In 1847, during the war with Mexico, Treasury 
notes to the amount of $26,122,100 ware issued. They 
bore interest at the rate of 5f and 6 per cent. They did 
not enter into the circulation and were not intended to. 
The foregoing issues of interest-bearing Treasury notes 
were merely government loans, of which the securities were 
in small denominations and had only short periods to run. 

When specie payments were suspended in 18 14, and 
again in 1837, silver small change disappeared because it 
was worth more per dollar than the bank notes in circula- 
tion. On both occasions private notes and tickets of less 
denominations than $1.00, and copper coins, were issued 
and put in circulation by bridge, ferry, and turnpike com- 
panies and by tradesmen and manufacturers. One hundred 
and sixty-four varieties of private copper coins of the period 
of 1837 have been preserved in numismatic collections. 
Most of them bore the names of the issuers, who promised 
to redeem them. 

Prior to the Civil War the fiscal operations of the gov- 
ernment were transacted exclusively with coin, by its own 
officers, without the intervention of banks. In August, 1861, 
Mr. Chase, the Secretary of the Treasury, negotiated three 
loans of $50,000,000 each from the banks of New York, 
Boston, and Philadelphia. In anticipation of 
* such loans. Congress had passed a law author- 
izing him " to deposit any of the moneys obtained on any of 
the loans in such solvent specie-paying banks as he might 
select," and to withdraw the same as required for the pay- 
ment of public dues. The object of this law was to enable 

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him to leave the money in the banks as a deposit till wanted 
for actual disbursement, and then to withdraw it by checks, 
which would be settled at the clearing house. This was 
a discretionary power, and Mr. Chase decided not to make 
use of it. The bankers argued that the financial operations 
of the government could be best carried on by leaving their 
gold in their own vaults as the basis of credit. Against the 
strong opposition of the banks, he required them to pay 
their gold into the sub-treasury at New York at the rate of 
about $5,000,000 per week. 

This policy does not appear to have had any harmful 
effect, except that of exciting the fears of the bankers them- 
selves.^ The public creditors, who received the gold, depos- 
ited it again in banks, where it became the property of the 
latter, like any other funds or securities among their assets. 
The largest amount of gold in the banks of the three cities 
at any time during the year was $63,200,000, August 17. 
On December 7 following, it was $58,100,000, although in 
the meantime they had loaned the government $100,000,000 
and had agreed to loan $50,000,000 more. These loans had 
been largely, but not wholly, reimbursed to the banks by the 
sale to the public of the securities they received from the 

Everything appeared to be going on well, but early in 

two untoward events occurred. The first was the report of the 
Secretary of the Treasury. It bad been generally felt that the 
plan of borrowing from the banks to carry on the war could be 
only a temporary makeshift intended to serve until a permanent 

1 In the first edition of this book I ascribed the suspension of specie 
payments in December, 1861, to the removal of the gold from the banks 
by Secretary Chase. An article on this subject by Mr. Wesley C. 
Mitchell, in the Journal of Political Economy y June, 1899, has convinced 
me that I attached too much importance to that action. 

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policy could be matured. It was hoped that the finance report in 
December would present a programme of adequate taxation. The 
disappointment over its failure to do so was keen, and the suspi- 
cion that the Secretary was not equal to his great task injured the 
yedit of the government The second event was the Trent affair, 
which threatened for a time to involve the Federal Government 
in a war with England. 

The moral effect of these events was immediately seen. The 
credit of the government declined, so that it became impossible 
for the banks to sell the government securities, which they held to 
' a large amount, except at a great pecuniary sacrifice. This cut 
off one source from which they had been obtaining specie. At 
the same time people became frightened, stopped depositing money 
in the banks, thus cutting off the other source. Even worse, the 
deposits began to be withdrawn and the specie reserve dwindled 
at an appalling rate. About twenty-seven million in specie were 
drawn inland from the New York banks in the month of Decem- 
ber, by far the larger part of it in the last two 

Suspension of weeks. It was all outgo now, and no income. 
Specie Pajrinents. ® * 

The end was but a question of time. After stand- 
ing the strain upon their reserves for two weeks, the New York 
banks were compelled, in order to save themselves from complete 
exhaustion, to suspend specie payments on the thirtieth day of 
December. Banks in other cities speedily followed suit. The 
suspension of the national Treasury was entailed as a necessary 
consequence of the suspension of the banks. Thus the first day 
of the new year 1862 saw the collapse of the whole scheme of 
national finance.^ 

Among the various devices for raising money at the begin- 
ning of the war, was that of issuing non-interest-bearing 
Treasury notes in small denominations fitted to be used as 
currency. Sixty millions of these had been authorized 
before Mr. Chase negotiated the above-mentioned loans. 
These notes were payable on demand and were receivable 

1 Mr. Wesley Mitchell in the Journal of Political Economy ^ June, 

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for taxes and duties on imports, but were not legal tender. 
Mr. Chase was paying them to such of the public creditors 
as were willing to receive them, simultaneously with his 
disbursement of the gold drawn from the banks. Thirty- 
three millions were outstanding when specie payments wetfe 
suspended. They were called " demand notes " in distinc- 
tion from the subsequently issued legal-tender 
The Legal-Tender ^^^^^ ^j^^ ^^jjj ^^^ ^^^ j^^^^^ ^^ ^^^^ ^^ 

posed by Mr. Elbridge G. Spaulding, a mem- 
ber of the Committee of Ways and Means, and was reported 
by the Committee by a majority of one vote on January 7, 
1862. It authorized the Secretary of the Treasury to issue 
$150,000,000 of United States notes not bearing interest, 
payable to bearer, of denominations not less than $5.00 
each. Fifty millions of these notes were to be in lieu of 
that amount of the demand notes aforesaid. The notes 
were to be receivable for all dues to the government and 
to be legal tender for all debts public and private within 
the United States and to be exchangeable for bonds of the 
United States bearing interest at 6 per cent, redeemable 
after Hve years and payable in twenty years. These bonds 
were familiarly known as the 5-2 o's. 

A delegation of bankers from New York, Boston, and 

Philadelphia came to Washington to remonstrate against the 

bill. A meeting was held at the office of the Secretary of 

the Treasury on January 11, at which these gentlemen and 

the members of the financial committees of 

Bankers remon- ^j^^ jj^^^^ ^^^ genate were present. Mr. 
strate against it. *^ 

James Gallatin, in behalf of the bankers, pre- 
sented a plan of national finance which would, in the opinion 
of those gentlemen, procure the means for carrying on the 
war without recourse to legal-tender notes. One of the 
proposals was to " issue 6 per cent twenty-year bonds, to 
be negotiated by the Secretary of the Treasury, and without 

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any limitation as to the price he may obtain for them in 
the market." 

Mr. Spaulding took ground at once against this plan. 
He tells us that he " objected to any and every form of 
* shinning' by government through Wall or State Street to 
begin with ; objected to the knocking down of government 
stocks to 75 or 60 cents on the dollar, the inevitable result 
of throwing a new and large loan on the market, without 
limitation as to price, ^"^ 

In order to avoid selling government stocks at 75 or 60 
cents on the dollar in an honest way, Mr. Spaulding initiated 
a policy which ended in selling those stocks at 40 cents on 
the dollar in a roundabout way, and cheating creditors, 
soldiers, and laboring men out of more than half their dues 
in an incidental way. This state of facts he mournfully 
acknowledges in his book, and he seeks to put on Mr. Chase 
the blame for too much inflation of the currency.^ But the 
man who opens the floodgates has no right to complain of 
the inundation. 

Although Mr. Chase, in his annual report for December, 

1861, distinctly rejected the idea of legal-tender notes (which 

was already in the air), on account of "the immeasurable 

evils of dishonored public faith and national bankruptcy," 

yet on January 22 following, he wrote to Mr. 

Mr. Chase assents Spaulding a qualified approval of his bill. The 

totheLegal-Ten- , *^ ^ ^ -r n , 

derBiu. letter was not satisfactory to all the members 

of the Committee. Consequently a resolution 

was adopted, asking his opinion as to the propriety and 

necessity of the immediate passage of the bill by Congress. 

^ " He [Chase] left the office with twice as much inflating paper out- 
standing as ough^ ever to have been issued, and with the promised 
doUar printed on the face of the greenback worth only 35 to 40 cents 
in gold." — Introduction to second edition of Spaulding's Finapcial 
History of th/ War^ p. li. 

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His answer was returned on the twenty-ninth. Much un- 
necessary verbiage was employed to convey the Secretary's 
assent to the legal-tender clause, but he gave his assent and 
added certain reasons for it which had not been advanced 
by anybody else. He said that some people gave a cordial 
support to the government by taking its notes at par, while 
others did not, — referring to the " demand notes " which 
were not legal tender. "Such discriminations," he said, 
" should, if possible, be prevented, and the provision mak- 
ing the notes a legal tender, in a great measure at least, 
prevents it by putting all citizens in this respect on the 
same level, both of rights and duties." This was very 
plausible. It appealed powerfully to the spirit of patriotism. 
But Mr. Chase was a victim of his own phrases. The duties 
of the citizen are to submit to the laws of conscription and of 
taxation, and his rights are to be exempt from impressment 
and confiscation. If others enter the army voluntarily or 
give their nroney to the government outright, those acts are 
over and above duties. They rise to the category of merits. 
The bill passed the House, February 6, 1862, by 93 to 
59. The legal-tender clause, however, narrowly escaped 

defeat in the Senate. On Mr. Collamer's 
The Bill passes. ..... 

motion to strike it out, the yeas were 17 and 

the nays 22. Senator Fessenden, the chairman of the Com- 
mittee on Finance, spoke and voted against the legal-tender 
clause, but he did not oppose it vigorously. In any narrow 
division of the Senate his influence would have been deci- 
sive, if he had exerted it. But evidently he did not wish to 
be responsible for the defeat of the measure. 

Two amendments of importance were added by the 
Senate : one making the interest on the government's obli- 
gations payable in coin ; the other giving the Secretary of 
the Treasury authority to sell bonds bearing 6 per cent 
interest at any time, at the market value thereof, for notes 

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or coin. The latter clause was intended to enable the Sec- 
retary to obtain gold at some price, to pay the interest on 
the bonds. In the Conference Committee of the two 
houses an additional plan was devised for this end, by 
making duties on imports payable in coin. 

The bill became a law on the 25th of February, 1862. 

On the 7th of June Mr. Chase asked for 
The Second Issue. . , .,1 r 1 . 

$150,000,000 more notes. A bill for this pur- 
pose was passed with very little opposition. It provided 
that not more than $35,000,000 should be of denominations 
smaller than $5.00. 

On the 6th of March Mr. Stevens introduced a bill author- 
izing the Secretary of the Treasury to dispose of any bonds 
or notes authorized by law, for coin, on such terms as he 
should deem most advantageous to the public interest. 
After the legal-tender act was passed it was remembered 
that $60,000,000 of demand notes were outstanding, which 

were receivable for customs duties. If duties 
c^e^ct^'" should be paid exclusively in these notes, 

some considerable time must elapse before 
any coin would come in to meet the interest payments. 
Mr. Stevens said that it was impossible to sell bonds "at 
the market value," and that the Secretary of the Treasury 
had sent down this bill and wanted to have it passed 
at once. He concurred in the necessity of it since the 
coin amendment had been adopted by Congress, although 
that amendment was against his judgment. The bill Vas 
passed by the House on the following day, and by the 
Senate March 11, without a division. In the Senate it 
was amended so as to read as follows : 

The Secretary of the Treasury may purchase coin with any 
bonds or notes of the United States authorized by law, at,such 
rates and upon such terms as he may deem most advantageous to 
the public interest 

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In the Revision of the Statutes, which was completed in 
1874, this clause was wisely retained among the provisions 
of law "general and permanent in their nature" ; for, so long 
as the Treasury is responsible for the maintenance of parity 
between gold and paper, its power to obtain gold ought to 
be unrestricted. 

When Congress assembled in December, 1862, it found 

that the most sacred obligation of the government — the 

pay of the army and navy — had not been 
Third Issue. ^ ^ , , "^ ,. "^ . , 

met, and that great distress existed among 

the families of soldiers in consequence. Mr. Gurley, of 
Ohio, in the House (January 15, 1863) drew a most harrow- 
ing picture of the suffering in consequence of this default. 
The amount of pay overdue was $59,000,000. 

It is not possible to acquit Mr. Chase of responsibility for 
this default. The House passed a resolution asking why he 
had allowed the pay of the army to fall into arrears. He 
had power under the law to sell 6 per cent bonds at their 
market value for greenbacks or coin. Why had he not done 
so ? His answer was in these words : 

The Secretary, solicitous to regulate his action by the spirit as 
well as the letter of the legislation of Congress, did not consider 
himself at liberty to make sales of the 5-20 bonds below their 
market value ; and sales except below were impracticable. 

What Mr. Chase meant was that the quoted value of 6 per 
cent bonds on a particular day — the 3d of January, 1863, for 
example — was 98 in currency. But if the Secretary should 
offer any large lot, the price would fall below 98. . In other 
words, there was no market value for bohds, although there 
was a market value for every other merchantable thing under 
the sun. There was much feeling against Mr. Chase among 
congressmen, on account of this interpretation of the law 
which they had passed to meet every financial emergency. 

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The Secretary's scruples on this subject led to the third 

batch of legal-tender notes, $100,000,000, authorized by a 

joint resolution dated January 13, 1863, "for the immediate 

payment of the army and navy of the. United 
Deprecuttion . 

States." The whole amount now authorized 

was $400,000,000. The price of gold at this time was 142; 
at the end of the month it was 159. Mr. Spaulding was 
surprised, at this juncture, to find that there was a great 
scarcity of currency. This he attributed, not to the advance 
in prices which had absorbed the additions to the circulating 
medium, but to the operations of the army and navy. He 
did not explain how the operations of a million men fighting 
and destroying property should call for more currency than 
those of the same number engaged in peaceful occupations 
at home. 

Two other kinds of legal-tender notes were issued during 
the war. They were called Treasury notes in contradis- 
tinction to the former ones, which were called United States 
notes, or popularly "greenbacks." On March 3, 1863, 
Congress authorized the issue of $400,000,000 of Treasury 
notes of denominations not less than $10, to run not more 
than three years, to bear interest not exceeding 6 per cent, 
payable in "lawful money," />., in either gold or United 

States notes. They were to be legal tender 
woTeT*"^^"^^ for their face value, excluding interest. The 

object of this law was to obtain loans from 
small investors without making further, additions to the 
currency. Anybody having $10 for which he had no imme- 
diate use could buy a Treasury note for that sum. He 
would be impelled to hoard it for the sake of the interest, 
but if necessary he could use it as money for its face value, 
in which case the payee would be impelled to hoard it. 

Under this act $44,520,000 of one-year notes and $166,- 
480,000 of two-year notes, bearing interest at 5 per cent. 

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were issued. A portion of these notes had interest coupons 
attached to them, which could be cut off and collected as 
the interest matured. These were found to be troublesome, 
since they caused alternate contraction and expansion of 
the currency. When the accumulated interest was sufficient 
to make it worth while for the owner to keep them they 
would be hoarded, and when the coupon was cut off they 
would be put in circulation. They were paid off by the 
government and canceled as soon as possible. 

Under this act there were issued also $266,595,440 of 
compound-interest notes to run three years. The rate of 
interest was 6 per cent, compounded semi-annually, and the 
interest was payable with the principal at maturity, and 
not otherwise. On the back of the note was a printed state- 
ment showing its value at the end of each six months. The 
$10 note was worth $10.30 at the end of the 

toteresTwotcs ^^^^ ^^^^ ^^^^ ^^^ $ii-94 at the end of three 
years. This was the most scientific form 
of legal-tender notes issued during the war, since it offered 
a continuing and increasing inducement to the owner to hold 
them as an investment instead of putting them in circulation. 
In the summer of 1862 the silver subsidiary coins began 
to grow scarce. By the coinage act of 1853 their metallic 
value had been reduced 7 per cent, but they remained in 
circulation with the greenbacks until the latter had depre- 
ciated more than 7 per cent. Then, in obedience to 
Gresham's Law, they were exported and sold as bullion, or 
put into circulation in Canada. As small change thus 
became scarce, people began to use postage stamps as a 
substitute. The demand for stamps became 
pactional Cur- greater than the Post Office Department could 
supply; and the stamps themselves, being 
flimsy and sticky, were inconvenient and exasperating to the 
last degree. Private individuals began to issue fractional 

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currency and copper coins in great numbers and varieties 
to supply an indispensable need. On July 17, 1862, Con- 
gress authorized the issue of small notes to take the place 
of the stamps and of the local " shin-plasters," as they were 
popularly termed. The first form issued was a piece of 
paper with the facsimile of a 5 -cent postage stamp in the 
center of it. The 25-cent note had the 5-cent stamp five 
times repeated. This was called "postage currency.'' By 
a later act fractional currency was issued in the form of 
promissory notes of the United States for sums less than 
one dollar. All of these, and also the postage currency 
notes, were redeemable by the government and receivable 
for all taxes except duties on imports. The notes were 
small in size, as well as of small denominations, and were 
easily worn out and lost. The largest amount in circulation 

at any time was about $27,000,000.^ ^ 

On March 3, 1863, Congress passed a law providing for an 
issue of bonds bearing interest at 5 per cent, redeemable in 

ten years and payable in forty years, — known 
The 10-40 Bonds. "^ . 

as the io-40's. Two features of importance 

are to be noted in this measure. One was a provision 

making the principal, as well as the interest, of these bonds 4 

payable in coin. The other was the repeal of the clause of 

the legal-tender act which made the notes convertible into 

bonds at par. 

When the legal-tender act was passed, creating two kinds 

of public debt, bonds and notes, nobody dreamed of paying 

the former with the latter. If any member of Congress had 

risen in his place while the bill was pending, and said that 

the government might sell $150,000,000 of interest-bearing 

bonds for gold, and then pay them off with the $150,000,000 

of non-interest-bearing and irredeemable notes authorized 

^ See article on "The Private Issue of Token Coins," by R. P. Falkner, 
in the Political Science Quarterly^ June, 1901. 

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by the same .act, he would have been considered a lunatic. 
But a year had not elapsed before a considerable stir was 
created by persons who held that all the government bonds 
then outstanding might be lawfully paid with greenbacks. 
Accordingly, Congress made the principal of the io-40's, as 
well as the interest, payable in coin. 

On the first of January, 1863, an old debt of the govern- 
ment, contracted in 1841, for $3,000,000 became due, and 
Secretary Chase paid it in gold. The House 
wdd^in^Gow*"** of Representatives had previously asked him 
by resolution (December 16) in what kind of 
money he intended to pay it. He postponed the answer 
until he had actually paid it. He then said (January 5) that 
he had paid it in coin in order to keep the government's 
credit good. 

It was disclosed later that the country had narrowly 
escaped a great danger. The Treasury had no gold at that 
time, or not sufficient to meet the claim, and some persons 
talked of paying it with legal-tender notes. At the last 
moment Mr. John J. Cisco, the assistant treasurer of the 
United States in New York, obtained $3,000,000 gold from 
the banks in exchange for legal-tender notes, on his personal 
pledge to redeem the notes with the first gold that came 
into his hands from customs duties. With the gold so 
obtained Mr. Chase paid the debt. If the government, at 
that critical juncture, had set the example of paying bonds 
with greenbacks, the consequences must have been fatal to 
its credit. 

Mr. Chase desired to have the funding clause of the legal- 
tender act repealed, because, as long as the holders of notes 
could convert them into 6 per cent bonds at par, no bonds 
could be sbld bearing a lower rate of interest. He believed 
that, if this privilege were taken away, a loan could be nego- 
tiated at 5 per cent. Congress yielded to his request, fixing 

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a date (July i, 1863) when the right of conversion should 
cease. This was an' inexcusable breach of contract and 
a financial blunder. By preventing the volun- 
mleaied^^'*^ tary conversion of the notes into bonds it 
prevented the early resumption of specie pay- 
ments after the close of the war, as Chief Justice Chase 
acknowledged in his dissenting opinion in the Legal Tender 
Cases, Whenever the rate of interest on government secu- 
rities in the money market should be less than 6 per cent, 
as it was immediately after the war, the notes would be 
converted into bonds and retired. This operation being 
automatic, being part of a contract, and coinciding with 
public opinion at the close of the war, which was favorable 
to specie resumption, would probably have worked out that 
result within a brief period. 

In June, 1864, Congress enacted that the whole amount 
of greenbacks issued or to be issued should never exceed 
$450,000,000, the last- $5 0,000,000 being a temporary issue. 
When the war came to an end and the army was paid off 
and disbanded the amount remained fixed in the law at 

Secretary Chase resigned his office June 30, 1864, ^^^^ 
was succeeded by W. P. Fessenden. Mr. Chase's last finan- 
cial act was the preparation of a bill, which he induced Con- 
gress to pass, to " prohibit certain sales of gold and foreign 
exchange.'' ^ It prohibited sales of gold unless the person 
selling it had it in his actual possession and 
T^^Anti-Goid delivered it to the buyer the same day. It 
prohibited the purchase or sale of foreign 
exchange to be delivered more than ten days subsequently. 
It provided also that no purchases or sales of gold coin or 
bullion or of foreign exchange should be made except at the 
ordinary place of business of the seller or purchaser occupied 

1 Shucker's Life of Salmon P. Chase ^ p. 359. 

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by him individually. Violation of the law was punishable 
by fine or imprisonment or both, the smallest fine being 
$1000. The idea of Mr. Chase and of the congressmen 
who voted for the bill was that the brokers caused the price 
of gold to advance. They imagined that they could stop 
the advance by an act of Congress. Mr. Chase was of that 
opinion. Three days after the passage of the law he wrote 
to Horace Greeley: "The price of gold must and shall come 
down, or I '11 quit and let somebody else try." ^ 

This measure became a law June 17, 1864. It remained 
on the statute book only two weeks. On the day it passed 
gold was quoted at 198. The next day it 
was 208, the next 230, and at the end of the 
month 250. At no time before had there been so rapid an 
advance. Congress repealed the act, without debate, on the 
2d of July. 

Early in 1864 Congress discovered that the issuing of 
greenbacks must be stopped and the policy of heroic taxa- 
tion adopted. Laws were passed which yielded in 1866 a 
clear revenue of $558,032,620. This was equal to two- 
thirds of the entire expenditures in 1864. If taxation on 
this scale had been enacted in 1862 it would have yielded 
in 1864 as much as that of 1864 did in 1866, and the gov- 
ernment's credit would have been strengthened in propor- 
tion to its income. Fewer legal-tender notes would have 
been required, the prices of commodities would not have 
advanced to any great extent, and the cost of the war to the 
taxpayers would have been much less than it was.^ 

1 See letters of Chase to Greeley in the New York Daily Tribune^ 
January 20, 1895. # 

2 Professor Simon Newcomb, in his work on Our Financial Policy 
during the Southern Rebellion, published in 1865, but written before 
the war was ended, computed the government's net loss due to the 
use of a depreciated currency, down to the end of the year 1864, at 

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The question whether legal-tender notes were necessary 
at the time when they were issued, i.e., whether the war 
Were Leeai- could have been carried on without them, has 
Tender Notes been much disputed, and very respectable 
Necessary? authorities are to be found on either side of 

it. Some are to be found on both sides, and among these 

^180,000,000, and estimated the loss still to be incurred, even if the war 
should end immediately, at $300,000,000 more, or $480,000,000 in all. 
According to his reckoning the government saved $97,000,000 during 
the first year of the war by paying greenbacks instead of selling bonds, 
since it paid them to its creditors at something near par in gold, 
whereas the gold price of its 6 per cent bonds in the market ranged 
between 78 and 90. By paying $1000 in greenbacks the government 
got nearly $1000 worth of property, gold value; whereas, if it had 
sold a $1000 bond, it would have received only $780 to $900. " We 
were enabled to pay off contracts made when gold was at par, with 
notes after they had depreciated one-third." But the progressive 
decline in the purchasing power of greenbacks turned the scale. In 
the third quarter of 1863 the government made an average loss of 10 
per cent in its purchases, and this loss rose to 68 per cent at the end 
of 1864. In 1865 *^® government was paying, with currency worth 75 
cents per dollar, debts contracted when it was worth only 40 or 50 
cents per dollar, and after 1879 it paid 100 cents on bonds sold at 
various rates of discount. 

In his work on Public Debts Professor H. C. Adams computes the 
extra cost of the war to the taxpayers, in consequence of the use of a 
depreciated currency, at $850,000,000. This is the difference between 
the debt created and the gold value of the currency which the govern- 
ment received for its obligations. 

Mr. Wesley Mitchell, in the Journal of Political Economy y March, 
1897, computes the net increase in the cost of the war, due to this 
cause, at $528,400,000. In reaching this sum he assumes that the 
government's receipts were increased $228,700,000 by the use of green- 
backs. In this calculation he assumes that the government's receipts 
from internal revenue were increased to the full extent of the depre- 
dation of the currency, but he acknowledges that there is room for 
doubt whether this was the fact. Mr. Mitchell's paper is well worth 
examination, but it is too complicated for reproduction here, even by 
way of summary. 

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is Mr. Chase himself. What he said as Secretary of the 
Treasury we have seen. As Chief Justice of the Supreme 
Court at a later period he held not only that the legal- 
tender act was unconstitutional as applied to preexisting 
debts, but that legal tender did not add anything to the 
value or usefulness of the notes. "The legal-tender 
quality," he said, "was valuable only for purposes of dis- 
honesty. Every honest purpose was answered as well or 
better without it." ^ 

A nation pays its annual expenses, in war a*s well as in 
peace, out of its annual earnings, except so far as it borrows 
from foreigners, and the only question for the Minister of 
Finance is how to lay his hands upon the portion he needs. 
Issuing legal-tender notes is one way ; taxa- 
wa^"Kn2ting.tion is another. The principal advantage of 
the former method is that it can be put in 
operation immediately, whereas taxation involves delay. On 
the other hand, taxation strengthens the government's credit 
and enables it to borrow for its immediate needs until the 
taxing machinery can be put in working order. Moreover, 
the government may borrow by means of interest-bearing 
notes, which are not legal tender. Not to multiply words 
about the assumed necessity of legal-tender notes in the 
Civil War, it may be safely said that other methods ought to 
have been exhausted first. The government was in great 
straits, and with very slender resources, in the war of 1812 ; 
but it issued no legal-tender notes, nor were specie payments 
suspended till September, 18 14, four months before the 
conclusion of peace. 

One of the reasons advanced by Senator Fessenden for 
opposing the legal-tender clause was that the loss would 
fall most heavily on the poor. All tricks of legerdemain 

1 See his dissenting opinion in the Legal Tender Cases^ 12 Wallace, 

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with the currency bear most heavily on the poor. Take a 
concrete case. The government wanted guns. It paid for 

them with legal-tender notes. The manufac- 
Tfnder wi^aees ^"^^^ must pay them to his workmen, who must 

buy their supplies of all kinds in a rising mar- 
ket. The cost of living not merely followed the gold premium, 
but generally kept above it. The dealers in commodities 
advanced their prices faster and farther than gold advanced, 
in order thus to insure themselves against loss by rapid 
fluctuations. Valuable lessons may be learned by consider- 
ing the variations in the purchasing power of a soldier's 
monthly pay over commodities for each quarter of the four 
years of the war, as compared with the prices of January, 
i860. The pay was nominally $13 per month. In the third 
quarter of 1862 it would buy $11.26 worth of gold and $11.11 
of the commodities usually consumed in the family. One 
year later it would buy $9.96 gold and $8.07 commodities. 
One year later Congress raised the pay to $i6 nominally, 
but even then (July, 1864) the gold value of the pay was 
only $6.19 and its purchasing power over commodities 
$6.40. In April, 1865, the gold value of the month's pay 
had risen to $10.77, t>ut its value in commodities was only 


The question, in what manner wages responded to the 
advance in prices during the war, is an important one. 
Professor Taussig, of Harvard University, made a computa- 
tion reaching substantially the foregoing conclusions, which 
he placed in graphical form. " It will be seen," he says, 
" that money wages responded with unmistakable slowness 
to the inflating influences of the Civil War. In 1865, 
when prices stood at 217 as compared with 100 in i860, 
wages had only touched 143. The course of events at 

1 See article by Mr. Wesley Mitchell in the Journal of Political 
Economy^ March, 1897. 

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this time shows the truth of the common statement that in 
times of inflation wages rise less quickly than prices, and 
that the period of transition is one of hardship to the wage- 
receiving class." ^ 

Professor Taussig's Chart showing the Course of Wages 
AND Prices of Commodities 












United States Prices — 
»4 •* Wages — 











1 \ 














^ . 










840 '45 '50 '55 '60 '65 '70 '75 '80 '85 '90 

We may here note the difference, in their effect on prices, 
between new supplies of gold and additions to the volume of 
an irredeemable currency. Nobody advances the price of his 

goods because new gold is coming out of the 
T^Z^Z. g™"'^^. Everybody knows that the gold he 

receives to-day is final payment, and that it will 
be accepted by others at the same general value to-morrow. 
Quite otherwise is the effect of an issue of irredeemable 

1 Paper read before the International Statistical Institute at Chicago, 

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paper. This is not final payment, but only a promise to pay 
at some indefinite time. The promise is also uncertain 
of fulfillment. Not all men realize these facts at first, but 
there are always some who do, especially bankers and deal- 
ers in foreign goods. To the latter class it is a matter of 
doubt whether they can replace their goods at the prices they 
formerly paid. Accordingly they will buy foreign exchange 
(which means gold abroad) in anticipation of their needs. 
This unusual demand will cause an advance in foreign 
exchange and also in the prices of the exportable commodi- 
ties (including gold), by which foreign exchange is made. 
Eventually the advance will extend to all goods, domestic as 
well as foreign, because producers and dealers find that they 
cannot replace their stocks at the same prices as before. 
The advance is usually slow at the beginning. Thus, 
although specie payments were suspended on the 30th of 
December, 1861, the premium on gold did not reach 4 per 
cent until the month of May following. 

When the premium on gold became noticeable in January, 
1862, the business of buying and selling it began naturally 
in the shops of those Wall Street brokers who dealt in 
foreign coins. These brokers had gold and silver on exhi- 
bition in their windows. People who wanted 

^'^iT'^^^^ coin went there to buy it. Those who wanted 
in Goia. J 

to sell coin for greenbacks naturally went there 
also. Gradually the dealings in front of their offices became 
so large that the traders blocked the sidewalks, and the 
public authorities were obliged to give special orders to the 
police to keep the crowds moving. The business being 
thus interrupted, the dealers took up their quarters in a 
neighboring restaurant, where the business went on until it 
outgrew its accommodations. Then the need of a Gold 
Exchange was recognized. Thirty or forty men who had 
been in the habit of meeting in the restaurant formed a 

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loose organization, hired a hall, and adopted rules by which 
any respectable man could become a member by paying $ioo 

per year, to defray the expenses. This was 
orgLfzed**"^* ^" ^^^ autumn of 1862. It was a voluntary 

organization, existing under the rule of honor. 
Eventually it had 450 members, consisting of bankers, 
brokers, and merchants of the principal cities of the Union. 
At first the business was carried on by the manual 
delivery of gold in return for certified bank checks. To do 
this the gold had to be carried through the streets by mes- 
sengers, who were sometimes knocked down and robbed. 
To facilitate the transactions the Treasury, in 1865, began 
to issue gold certificates of deposit, under authority of a law 
passed two years earlier. By and by the business becanae 
so large that it could not be carried on by manual delivery, 

even with the help of gold certificates. Then 
Goid^Exchange ^^^ ^^j^ Exchange Bank was started as an 

adjunct to the Gold Exchange. This was an 

institution incorporated under the laws of New York, with a 

capital of $1,000,000. It did a regular banking business 

with its own capital, and it acted as a clearing house for 

the Gold Exchange at a fixed rate of compensation. 

The method of clearing was as follows : Each transaction 

was noted on a "ticket of advice" signed by both buyer 

and seller. All the tickets were passed into the bank. If 

Mr. A. had bought $1,000,000 worth of gold from various 

persons at various prices and had sold $999,000, then 

instead of receiving from and paying to all 
Gold Clearings. . 

these people he would settle only with the 

bank. He would receive at the clbse of the day $1000 in 

gold and would pay whatever sum in greenbacks was due 

from him as the resultant of all his transactions. The 

usual daily amount of such clearings was $60,000,000 to 


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All the foreign trade of the country, both imports and 
exports, was regulated by the daily and hourly quotations of 
the Gold Room. This trade could not have been carried 
on otherwise. The wholesale prices of all 
NeS^y'^^^ importable and exportable commodities were 
regulated by the quotations. Retail prices 
were affected at longer range. That is, the retail dealers 
were obliged to fix their prices high enough to cover fluctu- 
ations and to save themselves from loss. The consumer 
was not able to buy at the lowest price that the law of 
competition would, under other circumstances, have made. 
Commodities not of an exportable or importable kind were 
affected in less degree and at still longer range, but were 
not exempt from the influence. In short, the whole trade 
of the country, both external and internal, pivoted on the 
Gold Exchange. Gold being the universal liquidator of 
commerce, it was necessary to know where and at what 
price it could be obtained in any desired quantity. The 
Gold Exchange gave the answer to this question daily and 
hourly, and was accordingly indispensable. 

During seventeen years the business of the country was 
regulated by the quotations of the Gold Exchange and was 

exposed to the raids of gold gamblers. The 
Gambling Raids. . o o 

most disastrous of these was the "Black Fri- 
day conspiracy," which was a trap set for exporters. The 
export trade of the country at that time necessitated the 
selling of gold in advance of its delivery. A buyer of wheat 
or cotton for export would make his purchase according to 
the current price of gold, but he would not get his returns 
from abroad for some weeks, nor could he get a negotiable 
bill of lading immediately. If the price of gold should" fall 
meanwhile, he would be a loser. So he would sell at once 
the gold which he expected to receive later. He would do 
this by giving an order to a broker in the Gold Exchange to 

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sell, putting up a small margin as a guaranty against possible 
fluctuations. Thus both the exporter and the broker would 
be protected, unless the fluctuations should be so great as to 
prevent the exporting merchant from keeping his margin 
good. In the latter event he might be ruined altogether. 

The act of "selling short" is most commonly frowned 
upon as something akin to ganibling. In this case the 
gambling consisted in not selling short. A fluctuating cur- 
rency introduces the gambling element into 
*'Sening Short. »» „ , . , . Ti • , r 

all business, but more especially into the for- 
eign trade of a country. By selling at once the gold that 
he expected to receive for his outward cargo, the exporter 
was doing a legitimate business. By waiting till his cargo 
arrived and his returns became available he took the risks 
of any amount of fluctuation in the interval. 

Mr. Jay Gould, who was at that time president of the 
Erie Railway, and a daring speculator, conceived the \dea 
of buying all the gold in the market and compelling the 
" short " sellers to buy of him, when their contracts should 
mature. He organized a clique of brokers, speculators, and 
Tammany Hall politicians, who succeeded by various devices 
and by enormous purchases in carrying the price up from 
133 to 162 in about twenty days, the greater part of the rise 
being in two days, September 23-24. The 
24th was always afterwards known as Black 
Friday. About 250 persons and firms were caught "short" 
of gold, who had no way of meeting their contracts except 
by buying it of Gould and his party. The consequences 
were thus described by a Committee of Congress, of which 
General Garfield was chairman : 

Hundreds of firms engaged in legitimate business were wholly 
ruined or seriously crippled. Importers of foreign goods were 
for many days at the mercy of gamblers and suffered heavy losses. 
For many weeks the business of the whole country was paralyzed, 

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a vast volume of currency was drawn from the great channels of 
industry and held in the grasp of the conspirators. The founda- 
tions of business morality were rudely shaken, and the numerous 
defalcations that shortly followed are clearly traceable to the mad 
spirit engendered by speculation. 

Black Friday and its evil consequences were due to the 
existence of a bad currency and a fluctuating standard of 
value. The Gold Room was at that time a necessity. 
Business could not be carried on without it, but it offered 
temptations and facilities for gambling which could not be 
resisted ; and this gambling was more calamitous than any 
other, because the prices of all commodities and securities 
were affected by it. It was only an exaggerated and glar- 
ing illustration of the evils of an unstable currency. 

When the war came to an end in May, 1865, ^^^ price 
of gold sank to 130, at which rate greenbacks were worth 
77 cents per dollar. It had been as high as 285 in July, 
1864, greenbacks being then worth 36 cents. The dif- 
ference between « these extreme quotations may be taken 
to represent changes in the public credit, or various vicissi- 
tudes and states of mind, dependent upon the war, wholly 
apart from the redundancy of the circulation, since the 
currency was no greater in volume at the one date than 
at the other. 

The baleful effect of these fluctuations was shown very 

clearly in California. As that state was an integral part of 

the Union, the legal-tender act was as valid 

California ad- there as elsewhere, yet the greenbacks never 
heres to the Gold , ^ ^, ^m r^ 

sundard. became current there until after specie pay- 

ments were resumed. California had no 
banks of issue and was entirely unfamiliar with paper 
money. It was not without a severe struggle, however, that 
the gold standard was maintained. The claims of loyalty 
were imported into the controversy, and it was stoutly 

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insisted by the greenback party that unwillingness to use 
legal-tender notes was akin to treason. Their opponents 
replied that they were entirely willing to use the notes at 
their actual value, but not at a higher value. They con- 
tended that, except for past debts, greenbacks could not 
be used at anything above their actual value, because the 
prices of commodities would fluctuate in some near propor- 
tion to the fluctuations of the currenc/. If taken for more 
than their actual value by ignorant persons, such persons 
would be cheated. In regard to past debts they said that 
it would be unjust to pay less value than the parties had 
agreed for.^ 

There is an advantage in studying the events in Califor- 
nia at this time, because what happened there, in plain sight 
and hearing, took place on an immensely larger scale else- 
where, but was, for the most part, unnoticed. 

There were no railways to the Pacific coast at that time, 
hence several months elapsed before any commercial effects 
were produced by the legal-tender act. On the 17th of 
September, 1862, a firm in San Francisco published a letter 
in the Alta California saying that they had been compelled 
to receive many thousands of dollars in, legal-tender notes 
for goods which they had bought for gold and had sold on 
credit at gold prices. They had tendered the 
^nts^™'**"^*^^ notes to their employees in payment of wages, 
but the latter had refused to receive them, 
saying that the boarding houses, the butchers, and the 
grocers would not take them at par. " For ourselves," said 
the firm, "we wish to maintain the government, but we 
would like the burden to fall equally on all classes." 

On March 5, 1863, a victim of the legal-tender law 
wrote to the Evening Bulletin of San Francisco that he had 

1 See article " Legal Tender Notes in California," in the Quarterly 
Journal 0/ Economics, October, 1892, by Professor Bernard Moses. 

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lent $10,000 in gold coin four years previously to a man in 
Sacramento, taking his note for it. The promissory note 
was lodged at the banking house of D. O. Mills & Co. 
for collection. The borrower came to the bank and ten- 
dered $10,000 in erreenbacks as full payment. 
Severe Losses. ^ , , '^^ , ^^ ^ ^ , 

Greenbacks were then worth 68 cents on the 

dollar. D. O. Mills & Co. refused to receive the tendered 
greenbacks without the consent of the owner of the note, 
and denounced the conduct of the debtor as unfair in 
the extreme. After a protracted dispute the creditor 
accepted the $10,000 in greenbacks and $1000 in gold, 
rather than enter upon a doubtful lawsuit. His loss then 
was $2200, but as he kept the notes a few months, it 
became $3500. 

Business was thrown into confusion by the contrariety of 
practice in different parts of the state with reference to 
greenbacks. Attempts were made to introduce into promis- 
sory notes, invoices, and bills of sale a clause stipulating 

for payment in gold, and these attempts were 
Business. partially successful, but this could not be 

done with accounts current, with telegraphic 
orders, or with retail trade conducted on the credit system. 
On the 8th of November, 1862, the merchants of San 
Francisco entered into a written agreement not to receive 
or pay legal-tender notes except at their market value in 
gold. Country merchants were invited to sign it also. If 
anybody should refuse to sign or should violate the agree- 
ment, the others would decline to have any business trans- 
actions with him. This plan was slow in getting into 
operation and could not be made comprehensive enough 
to meet the emergency, since it included regular dealers 
only, and not transient customers. 

Presently a case came into court, where a citizen had ten- 
dered greenbacks for state taxes and the collector had 

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refused to receive them. The Supreme Court of the state 

decided that taxes were not "debts," and hence that the 

legal-tender law did not apply to them. This 

Greenbacks not yiew was eventually sustained by the Supreme 

Legal Tender for 

Taxes. Court of the United States. The decision 

of the state court had a great influence on 

local public opinion, by strengthening the hands of the 

anti-greenback men. 

In October, 1862, the Board of Supervisors of San Fran- 
cisco adopted a resolution to pay the interest on city and 
county bonds in gold coin and instructed their financial 
agent in New York to advertise to that effect. • This action 
likewise tended to strengthen the position of the anti- 

On February 12, 1863, resolutions were introduced in the 
Legislature, asking the general governitient to except Cali- 
fornia from the operations of the legal-tender 
ff interest.^^*^ law. One of the reasons advanced by the 
mover of the resolutions was that the rate of 
interest had risen to double the customary rate because 
lenders were fearful that no form of contract could prevent 
the payment of greenbacks where gold had been promised. 
Lenders required a higher rate to compensate them for this 
risk. The resolutions were, however, rejected. 

An agitation now was started by the Daily Herald for a 
law to enforce the payment of contracts in whatever kind of 
money the parties might agree for. The Legislature took up 
the subject in earnest, and in April, 1863, passed a law to 
this end, not mentioning gold, greenbacks, or any particular 
kind of money by name. This was known 
^iflc contract ^^ ^^^ Specific Contract Law. It provided 
merely that in an action on a contract, or 
obligation in writing, payable in a specified kind of money 
or currency, the judgment should be payable in such money 

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or currency. The parties might stipulate for English sover- 
eigns, or Spanish doubloons, or notes of the Bank of France, 
as well as for American eagles, or greenbacks; the law 
would enforce the contracts in all cases. The act was 
passed upon by the Supreme Court of the state the same 
year and pronounced constitutional. It was also held to 
be applicable to contracts made before its 
Sustained by the passage. Both these doctrines were subse- 

Sapreme Court of 

the United States, quently affirmed by the Supreme Court of the 

United States, in terms which implied that the 
Specific Contract Law was superfluous. In other words, 
specie contracts were enforceable without it. 

It remains to notice other decisions of the Supreme Court 
of the United States on the subject of legal-tender notes. 

In the case of Lane County vs. Oregon^ 
Detis^ns^'''''* (December, 1868) the court held unanimously 

that the legal-tender acts of 1862 and 1863 
did not apply to taxes imposed by the authority of a state, 
and that taxes are not "debts." It followed that if a state 
made its taxes payable in gold the taxpayer's obligation 
could not be discharged with legal-tender notes. 

In Bronson vs. Redes'^ (December, 1868) the court held 

that a contract specifically payable in gold and silver coin 

could not be discharged by a tender of United States notes. 

In Butler vs. Horwitz^ immediately following, it was held 

that a contract to pay a certain sum in gold and silver coin 

is, in legal effect, a contract to deliver a cer- 
Enforceahie*'^ tain weight of gold and silver of a certain 

fineness. In this case the contract had been 
made in 1791 and was for payment in " English golden 
guineas." It was held in this case that damages for breach 
of contract should be assessed in coin also. 

1 7 Wallace, 71. 

2 7 Wallace, 229. 

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In Hepburn vs. Griswold'^ (December, 1869) it was held 
by five judges against three (the opinion of the court being 
delivered by Chief Justice Chase) that the making of notes, 
or bills of credit, a legal tender in payment of preexisting 
debts is not a ipeans appropriate, plainly adapted, or really 
calculated to carry into effect any express 
caw^^^^"" power vested in Congress ; is inconsistent with 
the spirit of the constitution and is prohibited 
by the constitution. Also that the clause in the acts of 
1862 and 1863 which makes United States notes a legal 
tender in payment of all debts, public and private, so far as 
it applies to debts contracted before the passage of those 
acts, is unwarranted by the constitution. 

The judges who concurred with the Chief Justice were 
Clifford, Nelson, Grier, and Field. The dissenting judges 
were Miller, Swayne, and Davis. 

In the Legal Tender Cases'^ (December, 1870) the fore- 
going decision was reversed by five judges against four. 
The opinion of the court was delivered by 

The Hepburn Justice Strong, who had been appointed in 

reversed. place of Justice Grier, resigned. A new mem- 

ber (Bradley) had been added, in pursuance 
of a law passed by Congress in April, 1869, raising the 
whole number of judges to nine. The opinion read by 
Justice Strong implied that the power of Congress to make 
the government's notes legal tender between individuals on 
preexisting contracts was an incident and consequence of 
the war power, but it did not expressly say so. The legal 
points of the opinion will not be considered here, but some 
attention must be given to an economical dictum found in 
it, viz.: 

It is hardly correct to speak of a standard of value. The 
Constitution does not speak of it. It contemplates a standard for 

1 8 Wallace, 603. 2 12 Wallace, 457. 

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that which has gravity or extension, but value is an ideal thing. 
The coinage acts fix its unit as a dollar, but the gold or silver 

thing we call a dollar is in no sense a standard of 
^^vfltt?^^°*^°'* a dollar. It is a representative of it. There 

might never have been a piece of money of the 
denomination of a dollar. There never was a pound sterling 
coined until 1815, if we except a few coins struck in the reign of 
Henry VIII, almost immediately debased, yet it has been the 
unit of British currency for many generations. It is thus a mis- 
take to regard the legal-tender acts as either fixing a standard of 
value, or regulating money values, or making that money which 
has no intrinsic value. 

The learned judge here confounds value with the standard 
of value, and speaks of both as having no concrete existence. 
Value is an ideal thing in the same sense that weight is. 
The former mean* exchangeability ; the latter means force 
of gravity. A dollar is a definite amount of exchangeability 
as an ounce is a definite amount of the force of gravity. 
The former will bring to its possessor a given quantity of 
goods ; the latter requires a given amount of force to lift it. 
Both are fitted to become standards, — the one of value and 
the other of weight, — and when made such by law they are 
not ideal but concrete things. The legal-tender act, as has 
been remarked previously, was a change of the definition of 
a term in common use, />., the word " dollar." It had pre- 
viously meant a definite amount of metal of a specified fine- 
ness. Under the new definition it meant the government's 
promise to pay this thing at an indefinite time. 

The five judges who concurred in this opinion were 
Strong and Bradley in addition to the minority in the 
Hepburn case. Separate dissenting opinions were read 
by Chief Justice Chase and by Judges Clifford, Field, and 

In /uillard ws, Greenman^ (March, 1884) it was held that 
1 no U. S., 42T. 

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Congress has the constitutional power to make the Treasury 
notes of the United States a legal tender in payment of 
private debts in time of peace as well as in time of war. 
Also that legal-tender notes redeemed and reissued under 
the act of May 31, 1878, are a legal tender, although not 

expressly made so by that act. The opinion 
Decis^n^** of the court was delivered by Justice Gray, 

and a dissenting one was written by Justice 
Field. In Justice Gray's opinion we find the following 
statement : 

The power, as incident to the power of borrowing money and 
issuing bills or notes of the government for money, borrowed, of 
impressing upon those bills or notes the quality of being a legal 
tender for the payment of private debts, was a power universally 
understood to belong to sovereignty in Europe and America at 
the time of the framing and adoption of the Constitution of the 
United States. 

George Bancroft, the historian, reviewed this opinion in 
both its legal and its historical aspects. Referring to the 

statement quoted above, he declares it to be 
Ssm*''''""'' "a stupendous error," and affirms that no 

such power was understood to belong to 
sovereignty in Europe at that time, />., in 1788.^ 


United States notes, otherwise called greenbacks, or legal 
tenders, were issued by Congress during the Civil War, to 
the maximum sum of $450,000,000. They were similar 
in their nature and consequences to the Colonial and 

1 " The Constitution of the United States of America Wounded in 
the House of its Guardians," by George Bancroft. Pamphlet, 1884. 

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Revolutionary bills of credit that preceded them, but the 
depreciation was not so great. The lowest rate reached 
by them was 35 cents per dollar in the year 1864. 

The notes were originally made convertible, at the option 
of the holder, into bonds bearing coin interest at 6 per cent. 
This connecting link between the notes and gold was 
unwisely repealed in 1863. If it had remained in force, 
the notes would have been exchanged for bonds whenever 
the price of the latter was above par, and specie payments 
would probably have been resumed automatically soon after 
the close of the war. 

As the notes were declared by law to be legal tender for 
all debts public and private, except duties on imports and 
interest on United States bonds, many people affirmed and 
believed that the principal of the bonds could be rightfully 
paid with greenbacks, although the latter were irredeemable. 
This misconception led to a political controversy of great 
bitterness, long duration, and doubtful issue. 

The cost of the war was largely enhanced by the use of 
irredeemable paper, the prices of arms, ammunition, and 
supplies having risen in consequence of currency inflation. 
The prices of commodities were relatively higher during 
the suspension of specie payments than the premium 
on gold. Dealers sought to protect themselves in this 
way against loss by fluctuations in the value of the 

The wages of labor did not advance pari passu with the 
prices of commodities during the war. The effective pay 
of the soldiers was seriously reduced by the advance of 
prices. Thus the pecuniary burden of the war fell most 
heavily upon the classes least able to bear it. 

Irredeemable currency makes changes in the distribution 
of property among individuals and classes. It works injus- 
tice between debtors and creditors and between employers 

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and employees. It promotes speculation, introduces the 
gambling element into business, defrauds the wage-earner, 
and brings ruin upon innocent people. 

The issuing of irredeemable paper is sometimes called a 
forced loan, but it has none of the characteristics of a loan. 
A loan, even when forced, implies an accounting and repay- 
ment to the lender. No such thing is promised or contem- 
plated when such paper is. issued, but merely that somebody 
shall be paid something at some time. Even this promise 
is not always fulfilled. 

The value of greenbacks during the suspension of specie 
payments was recorded during the business hours of each 
day by actual sales and purchases of gold on the New York 
Gold Exchange. In 1864 Congress attempted to check the 
depreciation of the currency by closing the Gold Elxchange 
and prohibiting sales of gold or foreign exchange for future 
delivery. The premium on gold advanced more rapidly 
after the passage of this act than before, and Congress 
repealed it two weeks later. 

Gambling in gold was one of the evils of the time, and 
almost a necessary one in connection with the foreign trade 
of the country. In 1869 a scheme was set on foot by an 
unscrupulous speculator for the purpose of "cornering" 
gold, /.<?., buying all the gold in the market and compelling 
persons who had sold it for future delivery to buy it from him 
and his clique. It resulted in a most disastrous panic, 
ruining or seriously crippling hundreds of business men in 
the principal cities of the Union. The day on which the 
catastrophe occurred was afterwards known in Wall Street 
as Black Friday. 

United States notes never became current in California 
until after the resumption of specie payments. The busi- 
ness community declined to receive them, except at their 
value in gold. The Legislature of the state passed an act 

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kno#n as the Specific Contract Law, by virtue of which con- 
tracts should be enforceable in any kind of money the 
parties should stipulate for. This law was upheld by the 
highest courts of the state and of the United States. 

The Supreme Court of the United States has held that 
a contract between private persons, if made specifically 
payable in coin, cannot be discharged with legal-tender 
notes. Also (December, 1869), that the legal-tender act of 
1862 was unconstitutional so far as it applied to debts con- 
tracted before its passage. The last-mentioned decision was 
reversed one year later (December, 1870). It was inferred 
from the language of the court in this decision that the 
power of Congress to make the notes of the United States 
legal tender between individuals on preexisting contracts 
was an incident of the war power. In March, 1884, the 
court held that Congress has power to make the notes of 
the United States legal tender in time of peace as well as in 
time of war. 


Knox's United States Notes, 

Spaulding's History of the Legal- Tender Money issued during 
the Great Rebellion. 

Newcomb's Critical Examination of our Financial Policy 
during the Southern Rebellion, 

H. C. Adams' Public Debts. 

Mitchell's " Greenbacks and the Cost of the Civil War," in the 
Journal of Political Economy., March, 1897. 

Banker's Magazine and Statistical Register^ 1861-65. 

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The provisional government of the Confederate States of 
America was formed at Montgomery, Ala., on the 8th of 
February, 1861. Its Secretary of the Treasury was C. G. 
Memminger. Its first financial act (March, 186 1) was the 
issue of $2,000,000 of Treasury notes in denominations not 
smaller than $50. They bore interest at the rate of 3.65 
per cent and were payable to order, — that is, to some person 
named in the note and transferable by his eTidorsement 
They were not intended to be used as currency and were 
not so used. Shortly afterwards the Confederacy borrowed 
$15,000,000 on bonds drawing 8 per cent interest, for which 
it received gold value during the year 1861. The money was 
expended in the purchase of arms, ammunition, and sup- 
plies abroad. An export duty of J cent per 

First Steps. 

pound on cotton was enacted, but by reason 
of the blockade of the Southern ports it yielded scarcely 
anything. Later in the same year. May 16, the Confed- 
erate Congress authorized the issue of $20,000,000 of non- 
interest-bearing Treasury notes of denominations of $5.00 
and $10, redeemable in specie in two years and convert- 
ible into 8 per cent bonds. These were intended to cir- 
culate as money, and they became at once the currency 
of the Confederacy. 

^ The principal authority for the facts embraced in this chapter is 
Professor J. C. Schwab's The Confederate States of America^ 1861-186S 
(Charles Scribner's Sons, 1901). 


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The issue of bonds was increased to $150,000,000, and 
it was sought to make this, in part, a produce loan. 
Cotton, corn, flour, pork, beef, and tobacco were to be taken 
in exchange for bonds, and agents were appointed to solicit 
subscriptions among the planters. Nine-tenths of all the 
subscriptions were in cotton. The reason why cotton was 
offered so profusely was that the Confederate Treasury was 
the only market open to the planter, whose customary mar- 
ket was cut off by the blockade. Meanwhile he had his 
own obligations to meet, and these could not be satisfied 
with 8 per cent bonds any more than with cotton itself. 

There was an outcry in many quarters for 
A Produce Loan. j j m. 

relief for the planters. Some persons advo- 
cated an issue of Treasury notes, with which to buy all the 
cotton offered for sale. Others proposed a loan of such 
notes on the cotton as security. Either of these plans, it 
was seen, would cripple the Confederate finances at the 
start, by filling the field of circulation before the armies 
were fairly in motion. The Confederate Congress did 
nothing for the planters, but some of the separate legisla- 
tures voted them Treasury notes of their own state issues 
on the security of cotton, which was left in the hands of the 
planters themselves. 

At the end of 1861 there/were $105)000,000 of Confeder- 
ate Treasury notes outstanding, and the premium on gold 
was 15 to 20 per cent, — the record is n : 
were never made legal tender. The 

them such was frequently under debate in 
Lega^ Tender '^^^ Congress, but was always decided in the neg-A' 

ative. Although the Confederate Congress 
did not, and Southern state legislatures could not, make 
the notes legal tender, the latter bodies, or some of them, 
deprived creditors of the remedies they had previously 
enjoyed for. collecting their dues in the courts of law. 

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3t exact. The notes 
question of making 


On August 19, 1 86 1, the Confederate Congress author- 
ized an issue of $100,000,000 of Treasury notes of denom- 
inations of $5.00 and upwards. It was the opinion of the 
Southern bankers, who were then holding a convention at 
Richmond, that this might be safely done, but the limit was 
raised to $150,000,000 before the end of the year. The 
notes were redeemable " six months after the ratification of 
a treaty of peace between the Confederate States and the 
United States." They were convertible into bonds draw- 
ing 8 per cent interest, or into call certificates drawing 
6 per cent, the latter being reconvertible into notes at the 
holder's option. 

Internal taxation was not resorted to by the Confederacy 
in the first year of the war, except by a direct tax on the 
states, which was paid mostly by issues of state notes or 

bonds, — that is, by borrowing. The customs 
Failure to tax. . ^ ^ 

yielded next to nothing, the ports being block- 
aded. It was Secretary Memminger's opinion at the outset 
that the war should be carried on by loans, with just suffi- 
cient taxation to pay interest. The Confederate Congress 
did not go so far in the way of taxation as Secretary Mem- 
minger advised. It preferred to rely on bond issues and 
note issues altogether. It accordingly passed an act in 
April, 1862, for $165,000,000 of 8 per cent bonds and 
$50,000,000 of new notes. It also issued another kind of 
note, of the denomination of $100, bearing interest at the rate 
of 7.30 per cent, receivable for taxes. It was supposed that 
these would be held for investment, but they were soon 
found to be in circulation. Prices of .commodities were 
rising so rapidly that the notes were worth more in trade 
than in one's strong-box. Only 9 per cent of the public 
expenses was met with bonds, 85 per cent with notes, and 
6 per cent with taxes, donations, and the confiscation of 
Federal property. 

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was 1 


As early as September, 1862, every barrier to note issues 
was thrown down by the passage of an act authorizing 
issues limited only by the public expenses. This system 
avoided present trouble, but it added to the anxieties of the 
Secretary of the Treasury, who knew that it was ruinous in 

<^ the long run. Produce loans were resorted to as a partial 

check to excessive issues of currency. The government 

thus obtained the ownership of 430,000 bales of cotton, and 

^ was ayfijta ship 19,000 bales to Europe by blockade-run 

V ners.^^In December, 1862, the Treasury notes outstanding, 

"^ -- including state issues, reached $500,000,000, and gold 

worth 3 for I. 

As the foregoing methods were proving fruitless, the idea 
was conceived of making cotton the basis of a loan abroad. 
After various negotiations the scheme was undertaken by 
the house of Erlanger & Co. of Paris. It was for ;^3,ooo,- 
000 sterling, and was secured by cotton in the Confederate 
States at a valuation of dd, per pound. Cotton was then 
selling at 2\d, per pound in England. The payments were 
to be made in monthly instalments, the first one being 5 per 
cent. The subscription was opened March 21, 1863, at the 
issue price of 90, and was said to have been over-subscribed 
five times in England alone. Yet after deducting brokers* 
commissions, interest on bonds, repurchases to sustain 
the market, and other expenses, the net amount realized 
on the $15,000,000 of bonds was only $6,500,000. The 
Confederate cruisers were paid for out of the net amount 
7' ^r eceived. 

M At the beginning of 1863 ^^' Memminger addressed him- 

self to the task of getting his Treasury notes funded into 
bonds. He recommended that a bill be passed providing 
that notes not funded before August i, 1863, should cease 
to be currency and cease to be convertible. The Confed- 
erate Congress passed a bill with elaborate provisions to 

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carry this plan into effect. It contained also provisions for 
issuing new notes to the amount of $50,000,000 per month. 
This attempt to brand the old notes while issuing new ones 
threw the currency into worse disorders than 
J^ndiLg^"^ before. The Richmond banks refused to 

receive the old notes as deposits, and the 
Virginia Legislature ordered that they should not be received 
for state taxes. Newspapers denounced the act of Congress 
as repudiation. The note-holders, seeing that the old notes 
were likely to become worthless, now hastened to fund 
them, and actually sent in $125,000,000 in three months of 
1863, but in these three months $150,000,000 of new notes 
had been issued. The total amount outstanding on the 
I St of January, 1864, was upwards of $700,000,000, and 
the gold quotation was 20 for i. Only $5,000,000 was 
raised during the year by taxation. The total debt of the 
Confederacy was now $1,221,000,000. 

Various schemes of repudiation were now on foot. 
They took shape eventually in a bill (passed February 17, 
1864), providing that all outstanding notes smaller than $5.00 
should be convertible into bonds and receivable at par till 
the I St of July, 1864, and thereafter be taxed 
Rewidiation ^"^ ^^ existence within the year. Simultane- 

ously another issue of notes was authorized 
(a sort of "new tenor," like the secondary issues of colo- 
nial bills of credit), for which the old notes, except those 
of $100 and upwards, could be exchanged at the rate of 
$3.00 old for $2.00 new ; $426,000,000 were so exchanged. 
The currency had now become unmanageable. The $100 
notes continued to circulate after they had been outlawed. 
There was active funding for some months after the passage of 
this bill, and its effect was shown in a decline of the gold 
quotation from $23 to $17 for $1.00; but when the new notes 
came out, it rose again to $23 in September, and* reached 

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$40 before the end of the year. The volume of currency 
was now fully $1,000,000,000. The old notes and the new 
ones circulated side by side, were equally discredited, and 
continued to depreciate together. They passed in trade at 
the same rates. The credit of the Confederate Government 
was now shattered, and Mr. Memminger resigned his office 
in midsummer, 1864. 

He was succeeded by George A. Trenholm of Charleston. 
The latter was not slow to perceive that compulsory funding 
had been a grave mistake. "Apprehensions of ultimate 
repudiation," he wrote to Governor Bonham, "crept like 
an all-pervading poison into the minds of the people, and 
greatly circumscribed and diminished the purchasing power 
of the notes." In January, 1865, ^^^ gold quotation was 
$53 for $1.00. Secretary Trenholm proposed to reverse the 
policy of compulsory funding, in order to save the govern- 
ment's credit, but it was too late. A bill to 
Pinal Collapse. 

carry Mr. Trenholm's plan into effect was 

passed by the House, but failed in the Senate. There was 
nothing to do now but to make fresh issues of notes, 
although the previous law for this purpose contained a 
pledge that there should be no more. In March, 1865, a 
bill for $80,000,000 of "new tenor" was passed over the 
President's veto. There was some talk about heavier taxes 
on exports and imports, although there were none to be 
taxed. The last scheme was for a specie loan of $3,000,- 
000, failing which there was to be a tax of 25 per cent on 
all the specie in the Confederacy. This singling out of one 
kind of property, and putting on it a^tax of one-fourth of its 
value, was confiscation. The Richmond banks, which were 
most exposed to the application of force, advanced $300,000, 
and almost immediately thereafter the Confederacy collapsed. 
/ Almost every blunder that it was possible to commit in 
liational finance was committed by the Confederacy, and on 

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a gigantic scale. The initial one was the failure to tax. 

The direct tax on the states, as we have seen, was largely 

met by borrowing, and this was additional to the Confederate 

borrowing and in the same field. In 1863 the Confederate 

Congress was awakened to the necessity of taxing the 

people by its own machinery, but it was now too late to do 

so effectively. The population was sparse. 

Fatal Mistakes. r- » 

the means of communication slow, and the 

territory to be covered wide, with much of it in possession 

of the Union forces. Worst of all, the swelling volume of 

the currency inflated the prices of property so that a given 

rate of taxation payable in dollars yielded a constantly 

lessening value. In order to overcome this difficulty a 

system of tithing was enacted, — that is, a tax payable in 

produce, of the kinds needed by the army. This system 

was grossly unjust to the farmers. The man who had to 

pay $100 in currency, and the one who had to contribute 

one hundred bushels of corn, did not stand on the same 

footing. The former might pay in 1863 ^^^ more than $10 

in value measured by gold, and not more than $5.00 in 1864, 

while the one hundred bushels of corn contributed by the 

latter remained a fixed, unshrinkable quantity. The farmers 

made so stout a resistance to the tithing system that it 

yielded very small returns. 

i-^-'The next blunder in Confederate finance was that of 
paying interest on loans in irredeemable paper. It must 
not be assumed that there was no other alternative. No 
other was ever tried. It would have been time enough to 
fall into the pit when it could not be avoided. The gov- 
ernment should have bought specie at the market price and 
paid the interest on the bonds with it, in order to support 
the public credit. 

J^ The third and fatal folly of the Confederacy was the 
compulsory funding act. No casuistry could disguise this 

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Step. It was repudiation, and it brought its own speedy 
punishment. If military events had not brought the Con- 
federacy to an end in April, 1865, it must have collapsed 
financially about that time. In other words, the power to 
supply the army in the field with food, clothing, arms, and 
ammunition could not have continued much longer. The 
blockade of the Confeder*^ cy, of course, intensified its finan- 
cial difficulties. Secretary Memminger attributed his failure 
to it. Indeed, if it had had free communication with Europe 
the Confederacy might have survived the errors of its Treas- 
ury Department and the war might have had a different 

he note issues of the separate states are of importance 
in connection with those of the Confederacy as throwing 
light oil the course of a paper currency unregulated by 
redemption in specie and unrestrained by anything except 
the whims of legislatures. The " wants of trade " in respect 
of money are never so imperious as when governments are 

issuing irredeemable notes. Prices of com- 
^e^CurrenS^ . modities advanced faster than the price of 

gold. This was because dealers made an extra 
charge for goods, by way of insurance against fluctuations 
in price. The advance of prices absorbed the new currency 
and created an abnormal demand for more. The appetite 
was shared by the state governments, by cities and counties, 
by banks, by railroad and other corporations; and finally 
the right of issue was assumed by private persons, such as 
tobacconists, grocers, barbers, and milk dealers, who issued 
tickets, which they gave out as change in the ordinary 
course of trade and promised to redeem in goods or ser- 
vices. Alabama began with an issue of $1,000,000 of state 
notes as early as February, 1861, and the amount was 
increased later to $3,500,000. These were receivable for 
state taxes. Georgia issued $18,000,000 of state notes 

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redeemable in Confederate notes. These were in effect an 
addition of that sum to the Confederate currency. Missis- 
sippi made liberal issues to relieve the distressed cotton- 
planters. All the states east of the Mississippi River issued 
notes. The city of Richmond issued scrip in denominations 
from 25 cents to $21.00. Charleston, Pensacola, Augusta, and 
other cities followed suit. Georgia granted " banking privi- 
leges," which meant the right to issue notes, to two railroad 
companies. Factories, turnpike companies, insurance com- 
panies, and others assumed this right either with or without 
legislative authority. Money was as nearly equal to the 
wants of trade as the printing press could make it. The 
state legislatures at last attempted to prevent the circu- 
lation of personal and corporate notes, but the evil had 
grown beyond their reach. Virginia passed three acts for 
this purpose, but they could not be enforced. People con- 
sidered these private notes as good as the public ones 
(as they were), and so continued to accept them. The 
banks issued their own notes freely, since they were not 
obliged to redeem them, suspension having been legalized 
in all the states. 



For the means of meeting the expenses of the Civil War 
the Confederate States of America relied almost wholly 
on Treasury notes, which served as the currency of the 
people. Those notes were not made legal tender by legis- 
lative authority, but were made practically so by public 
opinion and by the repeal of state laws for the collection 
of debts. Their course was similar to that of the Revo- 
lutionary bills of credit. They became nearly worthless 
before the close of the war, and were repudiated in part 
by the Confederate government and were superseded by 

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another batch, a sort of " new tenor," which pursued the 
same downward career. 

Secretary Memminger said that it was impossible to carry 
on war by means of taxes alone. This was a mistake. 
Except money borrowed abroad, every country pays the 
cost of a war at the time of the war. The Southern Con- 
federacy presents an easy illustration of this maxim, because 
it was for the most part isolated, having little communication 
with the outer world, and because all of its debts were oblit- 
erated at the end of the war. Obviously somebody paid the 
cost. It was not paid by foreigners (except the trifling sum 
borrowed in Europe), nor did it fall from the moon. There 
being nobody else to pay it, the people of the Confederacy 
must have paid it, and must have paid it during the time of 
the war, and not a moment later. To levy taxes sufficient 
to pay the whole of each year's expenses within the year 
would not have made the burden any greater than it actu- 
ally was. The Confederacy, by assuming that taxes to pay 
interest on money borrowed would be sufficient, did not get 
rid of heavier ones. It only levied them in a different way. 


Schwab's The Confederate States of America ^ 186 1 -1863. 
Capers' Life of C. G. Memminger, 
Pollard's Southern History of the War, 

E. A. ^m\^s. History of the Confederate Treasury ^ in Publi- 
cations of the Southern History Association (Washington, 1901). 
Statutes of the Confederate States,- 

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The money circulating among the people is a powerful 

educator. It teaches either truth or false- 

Edul^tor^ hood. Sometimes the results of its false 

teachings are merely whimsical ; more often 

they are disastrous. 

We have seen in a previous chapter that after the forma- 
tion of the Latin Monetary Union a million and a half of 
silver francs, of the coinage of the Papal States, rushed into 
France with those of Italy proper, although the Papal gov- 
ernment was not a member of the Union. These coins bore 
the effigy of Pope Pius IX. They gradually found their 
way into the pockets of the least intelligent members of the 
community. In 1875 there was a loss of two sous on each 
of these Roman francs, and in some parts of France the 
Roman Catholic priests lost their influence with the peas- 
ants in consequence.^ The latter put the blame of their 
loss on the Pope and on the priests as agents of the Pope. 
One of the consequences of this delusion was that all can- 
didates for the Chamber of Deputies who were supported by 
the priests were defeated by the votes of the peasants. It 
was useless to say to these people that they ought not to 
have accepted the Roman coins, that the Papal States were 
not members of the Monetary Union, and. that neither the 
Pope nor the priests were to blame. The people could not 

1 Round my House ; Life in France in Peace and Wary by Philip 
Gilbert Hamerton, p. 214. 


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understand such things. The only facts they could grasp 
were the Pope's effigy on the coins and the loss of the two 

Our legal-tender act taught people false notions. First, 
it led large numbers of unreflecting persons to believe that 
the government can make money. If the government can 
do so, people argued that it ought to make money plentiful. 
The legal-tender act led to the belief also that the govern- 
ment's bonds were payable in greenbacks. The act said 
that the notes should be lawful money and a legal tender 
for all debts, public and private, within the United States 
except duties on imports and interest on government bonds. 
These words printed on the greenbacks led 
ip^thGrc^nbacks ^^^^i^^^^^s of people to think that the govern- 
ment could rightfully pay the first piece of 
paper with a second one. If it could do so, it could pay 
the second with the first. Thus, by swapping one for the 
other, the whole debt might be paid without taxation. As 
all other governments could do what we could, all national 
debts might be settled in a twinkling. But there would be 
no need of taking the trouble to exchange an interest-bear- 
ing bond for a non-interest-bearing note. The whole debt 
could be canceled by simply passing a law saying, "All 
bonds of the United States are legal tender and shall cease 
to bear interest after the passage of this act." 

The policy of paying the 5-20 bonds in greenbacks was 
advocated by General Butler in the Republican party, and 
by George H. Pendleton in the Democratic, immediately 
after the close of the war. Both of them were defeated in 
their respective national conventions in 1868, but in differ- 
ent ways. The Republican Convention discountenanced in 
its platform the payment of the bonds in greenbacks. The 
Democratic Convention favored it, but rejected Mr. Pen- 
dleton as a clandidate for the presidency, and nominated 

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Horatio Seymour, who was strongly opposed to that policy. 
The Republicans carried the election, and soon thereafter 
(March 18, 1869) Congress passed an act, declaring that all 
government obligations were payable in coin unless the kw 
under which they were issued expressly provided for some 
other payment. 

This did not put an end to the controversy, however. 
The fight was long and bitter. If the question of paying 
the bonds with greenbacks had been referred to popular 
vote at any time between the end of the war and the resump- 
tion of specie payments, the result would have been very 

In his annual report, December, 1865, the Secretary of 
the Treasury, Mr. Hugh McCulloch, recommended the 
policy of contracting the currency with a view to the early 
resumption of specie payments. The House of Representa- 
tives, on the 1 8th day of that month, by a vote of 144 to 6, 
adopted a resolution " cordially concurring " in the recom- 
mendation. An act to carry that policy into 

fractfon*a?op^^^^ ^^^^^ ^^^ P^^^^^ AP"^ ^2, 1866. It au- 
thorized the Secretary to sell bonds for the 
purpose of "retiring Treasury notes or other obligations 
issued under any act of Congress, . . . provided that, of the 
United States notes, not more than $10,000,000 may be 
retired and canceled within six months from the passage 
of this act, and thereafter not more than $4,000,000 in any 
one month." 

In February, 1868, Congress suspended the reduction of 
the currency under the foregoing act. The act thus repealed 

had been in force twenty-one months, and 
Repealed. _ , , , , , , 

44,000,000 of the greenbacks had been re- 
tired, but the Secretary had not exercised his full powers 
under it. The amount outstanding when the cancellation 
was suspended was $356,000,000. 

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In 1870 and 187 1 the Secretary of the Treasury, Mr. 
George S. Boutwell, issued $6,000,000 of legal-tender notes 
in lieu of those retired by his predecessor, Mr. McCulloch, 

showing that, according to his view, those 
re^Mued*^^ notes were still legally in existence, although 

they had been actually withdrawn and can- 
celed. The Senate Committee on Finance made a report 
upon this action, holding that the Secretary had no power to 
issue notes for any portion of those retired under the act of 
1866. Although Congress took no action on the report. 
Secretary Boutwell retired a large part of the reissued notes, 
and his successor, Mr. Richardson, retired the remainder. 
Soon afterward. Secretary Richardson himself reissued 
$26,000,000 of the retired notes in a vain attempt to check 
the financial panic of 1873, thus bringing the whole amount 
up to $382,000,000. 

In February, 1874, the Senate Committee on Finance 
reported a bill, the first section of which fixed the maximum 
amount of United States notes at $382,000,000, and the sec- 
ond section provided that, on the ist of January, 1876, the 
Secretary of the Treasury should either exchange gold coin 
at par for United States notes, or give 5 per cent bonds 

for them on the demand of any holder of the 
Inflation Biu ^^^^^ ^j^^ ^^jjj ^^^ amended in the Senate 
of 1874. 

• by "inserting $400,000,000 instead of $382,- 

00.0,000 and by striking out the second section altogether. 

This was known as the Inflation Bill, as it sanctioned the 

policy of adding to the volume of an irredeemable currency 

in time of peace. It passed both houses, but 
Presid^nrGrant ^^^ vetoed by President Grant, who thereby 

rendered the country a great service. Yet he 
intended at one time to sign the bill and had written a paper 
to accompany his approval of it.^ Congress then hurriedly 

' See letter of Hamilton Fish, Secretary of State, Appendix A. 

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passed another bill fixing the maximum amount of legal- 
tender notes at $382,000,000, which was signed by the 
President June 22. . 

The Inflation Bill having been a Republican measure and 
vetoed by a Republican President, the party was left in a 
position of great embarrassment, and was badly beaten in 
the congressional elections of that year. It could neither 
inflate nor stand still. The only other course was to take 
steps for resuming specie payments. It improved the few 
remaining weeks of its power to pass a bill for this purpose. 
The bill was reported from the Committee on Finance by 
Senator Sherman, December 21, 1874, and passed the fol- 
lowing day without any change. It first removed certain 
restrictions upon the circulation of national 

ti^n Acfof^r. ^^^^^ ^"^ provided that the Secretary of the 
Treasury should " redeem " greenbacks to the 
amount of 80 per cent of the new bank notes issued, until 
the total volume, which was then $382,000,000, should be 
reduced to $^00.000 .000. It provided that the Secretary 
should, "on and after Janu ary i, 1 829, rede em in__i:oiiu the 
United S tates legaj -tender notes then outstanding, on their 
presentation for redemption at Ifie office of the assistant 
treasurer of the United States in the city of New York, in 
sums of not less than fifty dollars." The ^ling of b^ nds 
to provi4e-jiLean&_fQr.redempliQiL_^^as authorized without 
limit as to amount. 

The word "redeem" was used in the act in two places 
without any definition of its meaning. Ordinarily the 
redemption of a promissory note means paying and cancel- 
ing it, and this was the necessary meaning of 

Me^ingf ^"""^ ' ^^^ w^''^ i" *^^ P^^c® whe^*^ it was first em- 
ployed. It meant that the volume of green- 
backs should be reduced to $300,000,000 by retiring and 
canceling the excess over that sum, for if the excess were 

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not canceled the reduction could not take place. The true 
meaning of the word having been determined in one part of 
the act, its use in another part would have been clear and 
binding upon all courts of law ; but Senator Sherman, when 
asked whether the greenbacks which should be redeemed 
would be put out of existence, refused to answer the ques- 
tion. The bill passed both houses without any explanation 
on this point, and became a law January 14, 1875. 

All doubts were resolved by Congress itself three years 
later. October 31, 1877, the House Committee on Banking 
and Currency reported a bill to repeal the specie resumption 
act, and this was passed by the House November 23, by a 
vote of 133 to 120. At this time the Democrats had a 
majority of twenty in the House. The Senate was composed 
of thirty-eight Republicans, thirty-seven Democrats, and one 
Independent (Davis, of Illinois), who usually voted with the 

Democrats on financial measures. The Senate 
reMai^r*^ rejected this measure by a majority of one 

vote only. April 29 the House passed a 
bill, 177. to 3/;, without deba te, forbidding the retiring or 
canceling of any more legal-tender notes and provTHin g that 
any thereafter redeemed should be reissued, paid out, and 
kegtincirculatiotr This bill was concurred in by the 
Senate, 41 to 18. Before its passage Senator Bayard offered 
an amendment that notes once redeemed should not there- 
after be legal tender between individuals, but this was 
rejected, 18 to 42. This measure became a law May 31, 
1878. At that time the volume of greenbacks outstanding 
was $346,681,016, at which it still remains. 

The passage of the specie resumption act was followed 
by a battle at the polls the following year. The center of 
this engagement was in the state of Ohio, where the Demo- 
crats had declared in their platform that the amount of 
money ought to be made "equal to the wants of trade.'' 

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This sophism was slain by Carl Schurz in a speech at Cin- 
cinnati, which decided the campaign. The phrase " equal 

to the wants ol trade " means the wants of any- 
campaign of body in trade. It also requires measures to put 

the person in possession of what he wants. 
Since all must be treated alike, it follows that everybody 
must be served with greenbacks at the public treasury till 
he says he has enough. To give everybody all the green- 
backs he wants would give nobody an advantage, except by 
canceling past debts. Therefore an act of Congress can- 
celing all debts would accomplish the same end more 

The immediate result of the voting in Ohio in 1875 was 
the election of Rutherford B. Hayes as governor. A sec- 
ondary result was his elevation to the presidency the follow- 
ing year. He appointed John Sherman Secretary of the 
Treasury. During 1877 and the following year Mr. Sher- 
man was engaged in refunding the national debt in pursu- 
ance of the act of July 14, 1870. In connection with this 
negotiation he arranged with a banking syndicate for the 
sale of new bonds under the resumption act, by which he 
was to receive gold coin at the rate of $5,000,000 per month. 
Before the 31st of December, 1878, he had accumulated 
$95,500,000 in this way, and the Treasury held about 

$20,000,000 additional derived from customs 
aafomSished duties. The law had prescribed no plan of 

resumption. Everything had been left to the 
Secretary's discretion and to the chapter of accidents. This 
laxity of Congress was due in part to a general disbelief 
that resumption would or could be accomplished under that 
act. When the time approached and the decline of the gold 
premium betokened a strong probability that the law would 
be carried into effect, the agitation in both political and 
financial circles was extreme. On the 17 th of December 

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the premium on gold disappeared quietly and the Gold 
Exchange was closed because there was nothing for its 
members to do. On the ist o f January, 187Q, the Tr easury 
offered to redeem it s legal-tender notes, b ut none were pre- 
sented foTThat purpose. The banks of the large cities had 
previously kept two kinds of accounts with such of their 
customers as desired them, one in paper and one in gold. 
They now discontinued this practice and kept accounts only 
in "dollars." Therefore nobody had any motive to draw 
gold from the Treasury to deposit in banks. 

The chapter of accidents did more than anybody had 
anticipated. The year 1879 proved to be the most remark- 
able in our history in a commercial sense. 
^Q^^isao"* The crops of wheat, corn, and cotton were 
unexampled in magnitude and excellence, 
while those of the Old World were extremely deficient. The 
balance of trade turned in our favor suddenly and strongly. 
This condition of things was repeated on a somewhat 
smaller scale in the harvests of 1880. The two years wit- 
nessed importations of gold to the amount of $175,000,000, 
putting the immediate success of specie resumption beyond 

No reserve for maintaining specie payments had been 
fixed in the law nor was the need of any reserve recognized 
until 1882, when the subject was brought to the attention 
of the Senate in an incidental way. A bill 
The $100,000,000 ^^ g^j^^^^ ^j^^ National Bank Act was under 

consideration. A section relating to gold cer- 
tificates of deposit was embraced in it.^ On the. 21st of 
June, in that year. Senator Aldrich moved an amendment 

1 The issue of gold certificates had been authorized by Section 5 of 
the act of March 3, 1863, in these terms : " That the Secretary of the 
Treasury is hereby authorized to receive deposits of gold coin and bullion 
with the Treasurer or any assistant treasurer of the United States, in 

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to it by providing that the Secretary of the Treasury might, 
in his discretion, suspend the issue of such certificates 
whenever the amount of gold in the Treasury available for 
the redemption of United States notes should fall below 

The object of the amendment was to prevent the holders 
of greenbacks from drawing gold from the Treasury, rede- 
positing it there, and taking gold certificates for it, all at 
one operation, thus perhaps possessing themselves of all the 
gold in the Treasury and at the same time using the govern- 
ment's vaults as a free safe depository. Senator Allison 
remarked, while this amendment was under consideration, 
that " thus far there has been no absolute definition of what 
the reserve fund should amount to." In order to supply 
such a definition. Senator Ingalls moved to amend the 
amendment, making it read as follows : 

Provided^ that the Secretary of the Treasury shall suspend the 
issue of such gold certificates whenever the amount of gold coin 
and gold bullion in the Treasury reserved for the redemption of 
United States notes falls below one hundred millions of dollars. 

In this form it became a law, July 12, 1882, and thus a 
reserve of $100,000,000 gold in the Treasury for the redemp- 
tion of United States notes was recognized as existing, 
although not established by affirmative legislation. It cre- 
ated in men's minds the habit of considering the greenbacks 
as redeemable in gold at the option of the holder, although 
they were legally redeemable in gold or silver at the option 
of the government. 

sums not less than $20 and to issue certificates therefor in denomina- 
tions not less than $20 each, corresponding with the denominations of 
United States notes. The coin and bullion deposited for, or represent- 
ing, the certificates of deposit shall be retained in the Treasury for the 
payment of the same on demand." 

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On July 14, 1890, Congress passed an act for the issue of 

an indefinite amount of legal-tender notes for the purchase 

of silver bullion. This is commonly called the Sherman 

Act. It was a part of the silver legislation treated in the 

following chapter.^ The notes were to be 

The Shennan Act. . ° , j ....„• 1 1 , 

redeemed on demand in "coin, either gold 

or silver, at the discretion of the Secretary of the Treasury, 
but it was declared in the words of the act to be "the 
established policy of the United States to maintain the two 
metals on a parity with each other upon the present legal 
ratio or such ratio as may be established by law." This was 
a hint rather than a command to the Secretary in favor of 
gold redemption. The notes were declared in the act to be 
"legal tender in payment of all debts, public and private, 
except where otherwise expressly stipulated in the con- 
tract." In practical effect this was a fresh issue of green- 
backs in time of peace, and of unlimited amount. The only 
restriction in the law was as to the rate of issue, which was 
to be the sum necessary to pay for 4,500,000 ounces of 
silver bullion each month at the market price. Nearly 
$156,000,000 of these notes were issued. A financial 
panic of great severity ensued, and the act was repealed 
November i, 1893. 

The act of 1890 was not grounded upon financial consid- 
erations. It was part of a political trade. In the Senate, 
April 29, 1896, Senator Teller of Colorado gave what he 
called the " unvarnished history " of the Sher- 

suyerandTa ^^^ ^ . which has never been contradicted. 
Bills in X090. 

He said that the Republicans desired to pass 

the McKinley tariff bill. The silver men desired to pass a 

free-coinage bill. The latter had a majority in the Senate, 

1 The Sherman Act of 1890 is introduced here for the purpose of 
presenting all the legislation respecting legal-tender notes in consecutive 
order. See page 199. 

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with power to adopt a free-coinage clause as an amend- 
ment to the tariff bill and thus compel the House to adopt 
it or lose the latter bill altogether. They did not follow 
that plan because they knew that President Harrison would 
veto a free-coinage bill, even if, in doing this, he should kill 
the tariff bill. So the silver senators determined to adopt, 
not a free-coinage measure, which would certainly be vetoed,, 
but the nearest possible approach to it, and put this meas- 
ure on its passage ahead of the tariff bill. This was done, 
as the following legislative record shows : 

May 17, 1890. The McKinley tariff bill passed the House. 
June 5. Mr. McKinley moved in the House to take up the 

Windom silver bill, which was amended by adopting the 

Conger substitute, and passed June 7, by 135 to 119. 
June 17. The Senate took up the House silver bill, amended it 

by adopting the Plumb substitute (a free-coinage measure), 

and passed it by 42 to 25. 
June 25. The House took up the silver bill, non-concurred in the 

Senate amendment and asked a conference. 
July 7. The Conference committee reported the Sherman bill, 

which was adopted by the House on that day and by the 

Senate July 10. 
July 14. The Sherman silver bill was approved by the President. 
July 25. The McKinley tariff bill was taken up by the Senate 

and passed September 1 1 . 

Thus the Sherman silver bill was passed by the Repub- 
licans as the price of the McKinley tariff. Mr. McKinley 
himself was an ardent advocate of the former measure. 
"Vote against this bill," he said (June 7, 1890), "and in 
my judgment you vote that there shall be no legislation on 
the silver question at this session of Congress. That is 
what I fear it means. We know we cannot have free 
coinage now except in the manner as provided in this 

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The McKinley tariff bill repealed the duties on sugar and 
molasses, which had yielded $55,000,000 of revenue in the 
fiscal year 1890, and the Sherman silver bill added about 
$50,000,000 per year to the public expenses for the purchase 
of silver bullion. These two measures exactly canceled the 
surplus revenue ($105,000,000) of the year 1890, and a new 
pension bill added $50,000,000 more to the expenditures in 
1893, when it came into full operation. Thus 
DeflcTr^^^*^ the ingredients of a witch's cauldron, in the 
shape of a Treasury deficit and a financial 
panic, were collected for President Cleveland's second 

That the country had a sufficiency of instruments of 
exchange in the summer of 1890, before the Sherman Act 
was passed, is proved by the fact that we exported about as 
many gold dollars as we obtained of new paper ones while 
■ the act was in operation. The output of new legal-tender 
notes to July i, 1893, was $140,661,694, and the net export 
of gold during the same time was $141,017,158. This coin- 
cidence was not accidental. Whenever there is an excess of 
instruments of exchange forced into circulation by their legal- 
tender faculty, one of two things will happen. If they are 
redeemable in gold, there will be an outflow of that metal. 

If not redeemable, there will be a depreciation 
Gold Exports. 

of the whole mass. The great exportation of 

gold in the years following the passage of the Sherman Act 

i§ thus easily accounted for, but it was stimulated by the 

alarm of investors lest specie payments should be suspended. 

On March 14, 1900, Congress passed "an act to define and 

fix the standard of value, to maintain the parity of all forms 

of money issued or coined by the United States, to refund 

the public debt and for other purposes." This is commonly 

but mistakenly called "The Gold Standard Act," whereas the 

gold standard was established by the act of February 12, 1873. 

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The act of 1900 reaffirmed the earlier act, but it also 

contained important specific provisions for maintaining the 

gold standard. It provided in direct terms 

The Currency Act ^^^ jj ^j^^ legal-tender notes should be re- 

of igoo. o 

deemed in gold coin on demand and that a 
reserve of $150,000,000 of gold coin and bullion should be 
kept in the Treasury for this purpose solely; that notes 
redeemed out of this fund should not be reissued except in 
exchange for gold ; that if the fund should at any time fall 
below $100,000,000, it should be restored to the maximum 
sum of $150,000,000 by the sale of bonds, and that none of 
the proceeds of such sales of bonds should be used to meet 
deficiencies of the current revenues. 

It was also provided that there should be a complete sep- 
aration of the currency functions of the Treas- 
I'^tZZ^Z "^y f^°™ its fiscal operations. Bureaus, or 
divisions, of issue and redemption were estab- 
lished in the Department, to which were transferred all the 
funds held for the redemption of greenbacks. Treasury 
notes, gold certificates, silver certificates, and currency cer- 
tificates. These were to be held as trust funds exclusively, 
and were not to be mixed with the ordinary receipts and 
disbursements of the government. The need of this pro- 
vision had been demonstrated by the events of President 
Cleveland's second term (1893-97), when the deficiencies 
of revenue amounted in the aggregate to $155,000,000, 
forcing the Secretary of the Treasury to draw 
Chain' ^'°*^^** upon the gold reserve to meet the current 
expenses of the government. This phenome- 
non was designated in common parlance the "endless 
chain." The phrase was a misnomer. It implied that 
there was something in the nature of the greenback pecul- 
iarly adapted to the purpose of pumping gold out of the 
Treasury indefinitely. In practice, the holders of the notes 

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presented them at the Tre'asury for redemption. After 
redeeming them the Secretary paid them out again, for lack 
of other money. Then they were presented for redemption 
a second time, and so on. But if the Secretary had had a 
surplus of daily receipts over daily expenses, the same green- 
backs could not have been presented for redemption twice 
without his consent. Hence the " endless chain '' could not 
Jiave existed. Under the act of 1900, which separates the 
currency function from the other operations of the Treasury, 
no such trouble can arise. Shortage of revenue cannot viti- 
ate the money in the pockets of the people and need not 
disturb their equanimity. Thus the act of 1900 does much 
to maintain the gold standard which had been established 
by law twenty-seven years earlier. 

The Treasury notes of 1890 are now in course of retire- 
ment. In the war-revenue act of June 13, 1898, the 
Secretary of the Treasury was directed to coin the silver 
bullion bought under the act of 1890 into silver dollars at 
the rate of not less than $1,500,000 per month. The act of 
1900 provided that, as they were coined, an equal amount 
of the Treasury notes which had been issued to pay for the 
bullion should be canceled as fast as they should come 
into the possession of the government, and that silver cer- 
tificates should be issued in place of them. 

rtl"^" ?f ^^ The effect of this measure will be to lessen the 
to be retired. 

direct liabilities of the gold reserve by the 
sum of $156,000,000 and to add that amount to the silver 
currency, plus $62,000,000 derived from seigniorage, which 
is the number of silver dollars that the bullion will yield 
over and above the cost of the metal. Authority was granted 
in the act of 1900 to use a part of this bullion (about 
$20,000,000) for subsidiary coinage, in order to bring the total 
volume of the latter up to $100,000,000, a corresponding 
amount of Treasury notes to be canceled. 

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The Secretary of the Treasury was directed to resume 
the issue of gold certificates, in denominations not less than 

$20, in exchange for gold coin deposited in 
Minor Provisions ^j^ Treasury. The issue of gold certificates 
of the Act of 1890. ^ , , . o • T 

had been suspended m 1893, m compliance 

with the law which said that it should be suspended 
whenever the amount of gold in the Treasury fell below 
$100,000,000. It was also provided that thereafter silver 
certificates should be issued only in denominations of $10 
and under, and that greenbacks should be issued only in 
denominations of $10 and upward. The Secretary was 
authorized, in his discretion, to issue a small amount of 
silver certificates in denominations of $20, $50, and $100, 
not more than i o per cent of the whole amount outstanding. 
The object aimed at in lowering the denominations of silver 
certificates and raising those of greenbacks was to give the 
field of retail trade as much as possible to the silver 

The issue of currency certificates was discontinued by 
the act of 1900. These had been authorized by the act of 
June 8, 1872. Under it any national bank might deposit 
United States notes in the Treasury, in sums of not less 
than $10,000, and receive certificates of deposit, in de- 
nominations of not less than $5000 each, the notes to be 
held as special deposits and to be used only for the 
redemption of the certificates. These were issued for the 
convenience of banks in settling clearing-house balances. 
The reason for discontinuing their issue was that, as 
there was now a plentiful supply of gold certificates for 
clearing-house purposes, currency certificates were no longer 

Since the passage of the act of 1900 the denominations 
of paper currency authorized to be issued and reissued are 
the following : 

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Greenbacks, $10 and upward to $1000; but some notes 
of the denomination of $5.00, previously issued, are still 

Gold certificates, $20 and upward to $10,000. 

Silver certificates, $1.00 and upward to $100, but not more 

than 10 per cent of the total volume shall be 
Denominations of r 1. • t. 1 1 ^ 

Paper Currency. ^^ ^^ig^^^ denommations than $10. 

National bank notes, $5.00 and upward to 

$100, but not more than one-third of the total issues of any 

bank shall be of the denomination of $5.00. Some notes 

lower than $5.00 and some higher than $100, issued under 

former laws, are still outstanding. 

Treasury notes of 1890, formerly issued in denominations 

of $1.00 and upward to $20, are now in course of retirement. 

None can be reissued. 


As government paper is a promise to pay money, its 
value depends upon the fulfillment, or expected fulfillment, 
of the promise, which, in turn, depends upon the ability and 
good faith of the issuing government. 

Several of the American states in the colonial period, 
whether able to redeem their paper or not, were unwilling 
to do so. The government of the Revolution and that of 
the Southern Confederacy, whether willing to redeem their 
paper or not, were unable to do so. The government of 
the United States after the Civil War, although able to 
redeem its paper, postponed redemption fourteen years. 
During that interval its policy in reference to redemption 
underwent frequent changes and was involved in doubt. 

Congress voted in December, 1865, ^^ favor of the early 
resumption of specie payments. In pursuance of this 
design, in April, 1866, it passed a law for retiring and 

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canceling the legal-tender notes at the rate of $4,000,000 per 
month. In February, 1868, it repealed the last-mentioned 
act, $44,000,000 of the notes having been retired meanwhile. 
In 1873 the Treasury Department reissued $26,000,000 of 
the retired notes, without authority of Taw. In 1874 Con- 
gress passed a bill to reissue the entire $44,000,000, but 
President Grant vetoed it, and it was not passed over the 

In 1875 Congress passed an act to provide for the 
resumption of specie payments on the ist of January, 1879. 
In 1877 the House passed a bill to repeal the specie 
resumption act, but this was defeated in the Senate by one 
vote. Both houses passed a bill providing that the legal- 
tender notes should not be retired when redeemed, but 
should be paid out and kept in circulation. The amount 
of notes then outstanding was about $346,000,000. 

Specie resumption took place January i, 1879. 

In 1890 Congress passed a law for a new emission of 
legal-tender notes of indefinite amount, to pay for silver 
bullion to be stored in the Treasury. The new issues of 
notes were followed by the exportation of gold to nearly 
the same amount and by a disastrous financial panic. 

This shifting policy indicates that there will always be 
uncertainty in respect of the redemption of government 
paper and of the amount issued. Such uncertainty attaches 
to the United States notes now outstanding, since it depends 
upon the political majority to decide what an^ount shall be 
issued and whether redemption shall continue or not. For 
this reason the notes should be redeemed with t*he surplus 
revenue of the government and canceled as soon as possible. 

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While Secretary Sherman was selling bonds for gold, to 
prepare for the resumption of specie payments, Congress 
was passing a bill for the remonetization of silver. In 
1876 this metal had declined 9 per cent from our old ratio 
of 16 to I. The currency expansionists, who had been 
sorely disappointed by President Grant's veto of the Infla- 
tion Bill and by the loss of the Ohio elec- 
A^totion*' ^^^"' turn ed eagerly to silver, as a means of 
accomplishing the _ends which they had 
failed to reach witli ^lSenbacks. Silvei:^they_said, was a 
product of labor. Its quantity could not be increased 
sudde nlyTy It was the doHaF of our fathers. It was the 
dollar of the poor man, of the debtor, of the common 
people. Looking at the law, they discovered that the silver 
dollar had been abolished by an act of Congress, passed in 
1873, and that those of them who were members of Congress 
at that time had voted for it. So they said that they had 
been tricked and deceived, that this act of 1873 was a con- 
spiracy against the debtor class, and that it was passed in a 
clandestine manner. They declared that this was a great 
wrong. Many people who had no particular interest to be 
served by inflation really thought. that a wrong had been 
done. Some of them even thought that the wrong had 
been done to silver itself, by depriving it of the "legal 
right of coinage." 


Digitized by VjOOQIC 


The charge that the act of 1873 was passed secretly was 
absurd on its face, since there is no way under our sys- 
tem of government to pass a law secretly. The act was 
called the "crime of 1873 "; and the accusation was reiter- 
ated frequently and supported by forged documents and 
false swearing in the political campaigns of 
The '' cnme of twenty successive years. Due diligence had 
been shown by the framers and promoters of 
the law to publish and explain its provisions, but very few 
persons, either in or out of Congress, took any interest in 
the question ; and of those who did so nearly all were in 
favor of its passage. Nor would any charge of fraud and 
secrecy have been brought against the supporters of the 
measure, if silver had not subsequently fallen in value. The 
bill was introduced in both houses in 1870, at which time 
16 ounces of silver were worth 40 cents more than i ounce 
of gold. Nor was there any time during the three years 
while the measure was pending in Congress when silver was 
worth less than gold according to the legal ratio. Hence 
there was no motive for deception. The persistence of the 
charge of fraud during so long a period of time, in the face 
of so many opposing facts, is one of the most singular 
episodes in our political annals. 

The movement for the remonetization of silver acquired 
considerable strength in 1876. The opponents of the Infla- 
tion Bill were taken by surprise when the 
MovemenMw^ ^^^^^^^^^^y assumed this new form. More- 
over, the question of bimetallism was something 
new and strange. Many persons who had considered green- 
back inflation ruinous were glad to have escaped the evil of 
unlimited paper but could see no harm in silver dollars. 

The opponents of silver were of three classes : (i) Those 
who were opposed to it in any form except as subsidiary 
coin ; (2) those who were opposed to free coinage except 

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by international agreement ; (3) those who did not believe 
that an international agreement was practicable but who / 

wanted to gain time, hoping that the excite- / 
S^p^i^T*"*"* ment would pass away. The advocates of/ 

silver were likewise of different types : (i) Tho 

silver miners, who wanted to sustain the price of theij* 

product; (2) the currency inflationists, who had been 

defeated and were glad to find a new weapon to their hand 

in place of the greenback^; (3) a multitude of misinforme i 

persons, who thought that an injustice, if not a fraud, had 

been committed in the demonetization act of 1873. 

On July 26, 1876, just before the adjournment of Congress, 

Mr. Kelley of Pennsylvania introduced a bill to restore 

the coinage of the silver dollar, as it had 
The Bland Bill. . . , 

existed prior to the act of 1873, and moved 
to pass it under suspension of the rules, which required a 
two-thirds majority. The bill failed : yeas 119, nays 68. A 
similar bill was introduced by Mr. Bland of Missouri the 
following year, and was passed by the House November 5, 
1877, by 164 to 34. 

In order to defeat free coinage and gain time, some of its 
opponents in the Senate said that it would not be right to 

1 An inflationist is one who desires that the government shall do 
something to make money more plentiful and prices higher, and whose 
political action is directed to that end. Professor Charles J. Bullock, in 
his Essays on the Monetary History of the United States, shows by .statis- 
tics that the support of the silver movement in the several states was 
generally in inverse proportion to the density of population and the abun- 
dance of capital. Thus eleven states whose density was above 60 per 
square mile supported the gold standard in the election of 1896. Of 
eighteen states whose density was between 21 and 46, only eight sup- 
ported the gold standard. Of sixteen states whose density was less 
than 18, only four supported the gold standard. " It is evident, there- 
fore," says Mr. Bullock, " that the inflationist movement at the present 
day, as in all previous times, finds its strength in the sparsely settled 
regions, where the scarcity of capital is most keenly experienced " (p. 1 19). 

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give to those who happened to be the owners of silver bul- 
lion, or who were digging it out of the ground, an advantage 
of 9 per cent over everybody else ; that this profit ought to 
accrue to the government; that, since the government had 
no silver bullion, it ought to purchase a certain quantity at 
the market price, coin it, and sell the resulting coins to the 
people, or use them to pay its expenses or to buy more 
bullion. This was a plausible argument to defeat the Bland 
bill and was probably the only one by which a free-coinage 
bill could have been prevented from passing at that time. 

An amendment proposed by Senator Allison 
Amendment — providing for the purchase of not less than 

$2,000,000 worth, and not more than $4,000- 
000 worth, of silver bullion each month, to be coined into 
dollars of full legal tender and to be paid out like any other 
money in the Treasury — was adopted by the Senate and 
accepted by the House. The bill was vetoed by President 

Hayes, on the ground mainly that it em- 

vetoedand bodied a violation of contracts which had 


been entered into since 1873, by introducing 
a less valuable payment than was contemplated by the 
parties. The bill was, however, passed over the veto and 
became a law February 28, 1878. The votes taken in the 
House fairly represented the state of public opinion at 
the time. There were 73 votes to sustain the President's 
veto — /.<?., against silver in any form — and 196 in favor of 
the limited coinage of the Allison amendment. As between 
the latter and the original Bland bill the vote was 203 to 72. 
The party of moderation and compromise exceeded the 
extremists on both sides. One section of the Allison amend- 
ment, which authorized the President to invite an inter- 
national monetary conference, led to the Paris conference 
of 1878. Another section authorized any holder of silver 
dollars to receive certificates of deposit from the Treasury 

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in exchange for them, in denominations not less than Jio, 
such certificates to be receivable for all government dues. 

On November 12, 1878, the New York clearing house, 
after a personal conference with Secretary Sherman and in 
anticipation of the resumption of specie payments, voted to 
admit the sub-treasuty to the clearing house, for the purpose 
of settling balances between the government and the banks ; 
to receive and pay balances in gold or in legal-tender notes ; 
to prohibit payment of balances in silver dollars or silver 
certificates, except in sums under $10; and to receive silver 
dollars from customers as deposits only under special con- 
tract to withdraw the same in kind. 

In 1882 Congress passed an act amendatory of the 
national banking law. In it was inserted a provision that 
'* no national banking association shall be a member of any 
clearing house in which such [silver] certificates shall not 
be receivable for clearing-house balances." The New York 
clearing house thereupon rescinded its rule discriminating 
against silver certificates but did not discontinue the practice. 
The members voluntarily declined to pay them to each other. 

The Bland- Allison Act did not make money more plentiful 

than it would otherwise have been, but merely substituted 

silver in place of gold. Two operations were going on, side 

by side. The mint, regarded as a manufactory, was paying 

out gold already in its possession, in order to purchase silver 

bullion, and was selling the coins so produced, crediting 

itself with the seigniorage, /.<?., the difference between the 

raw material and the finished product. On the other hand, 

the people needed a certain number of instruments of 

exchange, called dollars, for the transaction of their daily 

business. These instruments they paid for 
Modus operandi. 

with their labor and their property, at the rate 

of 100 cents gold per dollar. Obviously they could have 

whichever metal they preferred, since gold value will always 

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bring gold. Thus the bill did not make money more plenti- 
ful, although it seemed to do so, but merely substituted one 
kind of money for another. 

The mode of operation was as follows: The government' 
bought (say) $2,500,000 worth of silver bullion, paying gold 
for it. When the silver dollars were produced, it might pay 
them out like any other money or it might make its next 
purchase of silver bullion with the dollars, or the certificates, 
resulting from the last purchase. If there was a public 
demand for this kind of money, the dollars wouM stay out. 
If not, they would come back to the Treasury through the 
custom house and the tax office, taking the place of gold in 
the payment of government dues. 

The officers of the Treasury were slow in learning how to 
ward off the evils of this queer kind of currency, of which 
they had had no previous experience. Each secretary 
restricted the coinage of silver dollars to the lowest amount 
permitted by the law, viz., $2,500,000 per month, or $30,- 
000,000 per year. As the coins were bulky and inconven- 
ient, the people refused to take any large quantity. At the 
end of June, 1879, only $8,000,000 had gone 
Slow Circulation i^to circulation, out of $36,000,000 coined. 
Dollars. The remainder were in the Treasury,^ an inert 

mass. Inasmuch as the government had a 
surplus of revenue more than sufficient to pay for the monthly 
purchase of silver bullion, no present harm resulted. 

The prosperity resulting from the crop conditions of 1879 
and 1880 called for an increase of the circulating medium 
and not merely led to the large importations of gold referred 
to in the preceding chapter, but drew out of the Treasury 
nearly all of the accumulated silver. This was taken in the 
form of certificates, in exchange for gold. The movement 

1 See Taussig's Silver Situation in the United States (second edition), 
which may be studied with profit for all periods down to the end of 1896. 

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was accelerated by an offer, on the part of the Treasury, to 

pay silver certificates in the West and South, in exchange for 

gold deposited in the sub-treasury at New 

Rapid Movement york. Whenever the rate of exchange was 

in 1879 and x88o. ^ 

in favor of the West and South, the person 
desiring to make remittances could save express charges 
by accepting the government's offer. In this way the sur- 
plus silver in the Treasury was worked off for the time 
being. "For the three years 1881, 1882, and 1883, the 
silver currency was absorbed by the public as fast as the 
dollars were coined at the mint.'* ^ 

A trade reaction began in 1884. The silver already in 
circulation remained * there, but the annual addition con- 
tinued. As fast as it was paid out by the 
Crisis in 1884. ^ . 1 . ., • . r / 

Treasury, it returned m the receipts for taxes. 

Simultaneously the public revenue began to decline, and the 
gold reserve showed a shrinkage of $34,000,000 in 1884-85. 
Gold receipts for customs duties fell from 75 per cent of the 
whole to 36. per cent, and silver receipts rose from 17 per 
cent to 36 per cent, the other receipts being greenbacks. 
In Boston, where the banks made no discrimination against 
silver, the certificates constituted so large a part of the cir- 
culation that, when it became necessary to send money by 
express to New York, a sufficiency of gold or greenbacks 
could not be obtained, and a premium of one-half of i per 
cent on funds bankable in New York prevailed in Boston for 
a short time. The New York banks even turned in $6,000,000 
of their goid to the Treasury, in exchange for fractional 
currency, in order to avert the use of silver certificates by 
the Treasury in the settlement of clearing-house balances 

In 1885 the Secretary of the Treasury, Mr. Manning, 
perceived that the true method of utilizing the silver 

1 Taussig, 24. 

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currency was to force it into retail trade. To make room 
for it, he gave orders to stop the issue of greenbacks of 
less denomination than $5.00 and to retain all such that 
came into the Treasury in the way of col- 
Smau Silver lections, in order to create a necessity for 
introduced. the use of silver. In 1886 he procured from 

Congress authority to issue silver certifi- 
cates of the denominations of $1.00, j52.oo, and $5.00. 
As national bank notes smaller than $5.00 had been for- 
bidden some years earlier, the field of small paper circula- 
tion was thus secured for silver certificates. Thereupon the 
demand for them became very large, rising in 1890 to 
$175,000,000 in denominations of $5.00 and under, and to 
$293,000,000 in all. The number of coined dollars in 
circulation at that time was $56,000,000 in addition. 

The introduction of small silver certificates happened to 
coincide with a shrinkage of the volume of national bank 
notes due to the redemption of the 3 per cent bonds and 
to a rapid advance in the price of other bonds, -which made 
it profitable for the banks to retire their circulation, sell 
their bonds, and realize the premium.^ One hundred and 
sixty-eight million dollars of the bank notes were retired 
between November, 1882, and February, 1890, — that is, in 
seven years and three months. The output of silver dollars 
during the same period was only $50,000,000 in excess of the 
bank notes retired. 

1 " In 1883 upwards of $353,000,000 government bonds were on 
deposit as a basis of bank-note circulation. Out of this total more 
than $200,000,000 were in the 3 per cents, and it was naturally these 
very 3 per cents which the Treasury selected in its public debt 
redemption [because they were subject to call at par]. Whenever such 
bonds were called for redemption, the bank possessing them was com- 
pelled either to replace them with other government issues bought in 
the open market, or else to retire its circulating notes." — Noyes* Thirty 
Years of American Finance^ p. 108. 

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When the silver coinage act was passed in 1878, its oppo- 
nents predicted that sooner or later it would cause a finan- 
cial panic. They said that, since the metallic value of the 

silver dollars was not equal to the face value, 
Panic predicted. . . , . . , ^ ^ 

they were simply a new kmd of fiat money, 

and that, whenever they should become redundant, they 
would act like any other fiat money, — like the greenbacks 
at the beginning of the war, for example. There would 
then be a change in the standard of value, if the coinage 
were continued. This was a true prophecy, but the fulfill- 
ment was delayed by the shrinkage in the national bank 
circulation and by the retirement of small greenbacks, which 
created a vacuum for the new silver to fill. But this was a 
silent operation. The public could not understand it, and 
so, as the years rolled on and no harm came from the 
coining of silver dollars, the predictions of panic fell under 
popular ridicule. 

The passage of the Sherman Act of 1890 and the reasons 
for it have been considered in the preceding chapter.^ 
There were now three kinds of fiat money 
! which the government, according to its de- 
clared policy, must keep at par with gold, namely, green- 
backs. Treasury notes, and silver dollars. All three rested, 
and still rest, upon the gold resources of the Treasury. 
Those resources consist of its accumulated reserve and of 
its daily receipts. It is immaterial, as regards the govern- 
ment's gold balance, whether redemption is made at the 
place where the reserve is paid out (the sub-treasury) or 
where the receipts come in (the custom house). The 
effect upon the balance is identically the same in the two 

Nearly $50,000,000 of new fiat money came into the 
channels of business the first year after the passage of the 
1 Page 183. 

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Sherman Act ; and, as -it happened, an equal amount of the 
surplus in the Treasury was paid out by enlarged appro- 
priation bills passed by Congress. These 
S'l^sgf ^^18^^ additions to the circulating medium presaged 
renewed exports of gold, which took place in 
the first half of 189 1 to the amount of J^y 4,000,000, — a sum 
hitherto unexampled for a single period of six months. 

The harvests of 1891, however, happened to give tempo- 
rary relief from the consequences of bad financiering. 
"The United States produced in that year the largest 
grain crop in its history before or since. While Europe's 
total wheat yield decreased 156,000,000 bushels from that 
of 1889, our own crops increased 255,000,000 bushels, the 
largest American crop on record." ^ The foreign exchanges 
turned in our favor, and we imported J5 0,000,000 gold in 
the six months succeeding the harvest. This was merely a 
streak of luck. As soon as the foreign demand for our 
grain was satisfied, the new fiat money began once more to 
produce its usual effects. Gold exports were resumed in 
1892. In November of that year the gold in the Treasury 
had fallen from $185,000,000 (in August, 1890) to $124,000,- 
000 and was still declining. Secretary Foster 
t^^Fosten*^^' ^^^ "^"^^ depressed. When he came to New 
York to speak at a dinner of the Chamber of 
Commerce, he said, among other things, that the govern- 
ment intended to maintain gold payments, even if it became 
necessary to sell government bonds for the purpose. This 
was an admission on his part that gold payments could not 
be continued without resorting to extraordinary means. 
Probably Mr. Foster made this speech in order to test public 
sentiment and to find out whether he would be sustained 
in issuing government bonds in time of peace. There had 
been no increase of the bonded debt since the close of the 

1 Noyes, 164. 

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Civil War, and some persons in high place denied that there 
was any legal authority to issue new bonds. Apparently 
Mr. Foster was satisfied by the applause with which his 
announced purpose was received by his hearers and by the 
press, for shortly afterward he issued an order to the Bureau 
of Engraving and Printing- to prepare new bonds. This 
order was dated February 20, 1893, and Mr. Foster was to 
go out of office on the 4th of March. Naturally, he pre- 
ferred to put upon his successor the onus of issuing the 
bonds, if he could. So he came to New York and persuaded 
the banks to give him a few millions of gold in exchange 
for legal-tender notes, enough to carry him along till the 4th 
of March. This enabled him to glide out of office leaving 
the J 1 00,000,000 redemption fund intact, but with only 
^982,4 10 gold in excess of that sum and with the penumbra 
of a deficit in full view. 

The shrinkage of the government's reserve and the con- 
tinued outpour of fiat money had shaken the confidence of 
the business communities on both sides of the water. The 
banks no longer furnished gold to their customers who 
desired it for export, but gave them legal-tender notes 
instead. Hitherto no doubt had crossed the minds of the 
community that the government would redeem its notes on 
demand, but now it was seriously questioned whether the 
Treasury could maintain gold payments. The bankers did 
not know whether the new Secretary of the Treasury, 
Mr. Carlisle, would take steps to replenish his reserve, and 
they could not know whether any steps he might take would 
be effectual. So th^y kept their gold and paid their debts 
with legal-tender notes. 

When Secretary Carlisle came into office, he saw bank- 
ruptcy approaching. The gold receipts of the Treasury 
were now less than 9 per cent of the total receipts. He 
first followed his predecessor's example by soliciting gold 

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from the banks in New York City. The banks responded 
by turning $8,000,000 into the Treasury, in exchange for 
legal tenders. This was quickly dissipated, 
and on April 15 the Secretary was obliged 
to acknowledge that the $100,000,000 fund had been 
encroached upon. It was the first time that this had 
happened since the fund was created. On the 20th the 
Secretary gave a newspaper interview, which was construed 
by the public to mean that he had doubts whether the 
$100,000,000 fund could be lawfully used for the redemp- 
tion of the Treasury notes of 1890. This was a fresh cause 
of alarm, which was, however, soothed by a later announce- 
ment from President Cleveland that the redemption of 
those notes in gold would be continued under all circum- 

On the 26th of June the news came that the mints of 
India had been closed to silver, and the price of that metal 
fell in three days from 82 cents to 67 cents per ounce. A 
run on the banks began at once. One hundred and fifty- 
eight national banks and four hundred and fifteen state and 
private banks were compelled to close their doors. 

The question has been much discussed whether the finan- 
cial disturbance of 1893 was a typical commercial crisis or 
a money panic. A commercial crisis is a shattering of the 
\i credit system due to a maladjustment of 

Crises^'^^*^ industry. If the conditions of production 

and consumption were at all times well 
balanced, so that no more wheat, cloth, iron, houses, fac- 
tories, ships, railroads, etc., were produced than could be 
sold or used at a profit, then each producer would be able 
to pay his debts promptly and there could be no commercial 
crisis. But in the complex conditions of modern society 
no such equable distribution of capital and labor is pos- 
sible. There is no omniscient eye to tell us when we are 

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producing too much of one thing or putting too much 
capital and labor into certain lines of business. The com- 
mercial world is, accordingly, subject to periodical crazes, in 
which there is a general rush to invest money in ways which 
seem to promise unusual gains. By and by these particular 
branches of trade are overloaded and cease to be remuner- 
ative. Then the adventurers cannot meet their obligations, 
and their creditors are crippled or made bankrupt. Lenders 
of money become alarmed and the credit system breaks 
down. The genesis of every true commercial crisis can 
be traced to such a disproportionate investment of capital 
in some particular branch or branches of trade and in 

A money panic, on the other hand, may come at a time 
when trade is in a normal and sound condition. Anything 
which threatens to impair the quality of the money in cir- 
culation may dry up the springs of credit, cause extensive 
failures, and produce some of the phenomena of a com- 
mercial crisis. Such conditions existed in i860 and 1861, 
when a large part of the circulating medium of the country 
was based on bonds of the Southern States, which were 
taking steps to secede from the Union. It cannot be 
denied that there was some unsound trade in 1893, but the 
one-sided development of industry and the top-heavy stage 
of speculation which mark the real commercial crisis were 
not general. On the other hand, the perils which menaced 
the standard of value were sufficient to account for the 
alarm and for most of the consequences that ensued.^ 

1 '* It is true that the years immediately preceding 1893, while they 
had been years of activity, had not shown the feverish speculation 
which commonly precedes the storm. Yet in some parts of the West, 
notably in Colorado, there had been wild gambling in land; and, what 
was probably more important, there had been in preceding years, from 
1886 to 1890, a great deal of reckless investment in railways and in 
iron-making industries. Certainly some great railway corporations had 

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Two powerful causes contributed to the panic of 1893: 
(i) a deficiency of revenue, pointing to the necessity of 
using the gold reserve to meet the current expenses of the 

government; (2) a fear in the public mind 
Panic.* ^ ^ ^^^^ there be a change in the standard of 

value. Yet, when the panic came, there was 
no observable tendency on the part of bank depositors to 
draw gold. What the frightened people wanted was the 
iheans of payment and especially the payment of wages. 
Government notes, bank notes, silver certificates, silver 
dollars, and subsidiary coins would meet this want as well 
as gold, and even better in some respects, because obtain- 
able in the smallest denominations. All these things com- 
manded the same premium as gold over certified bank 
checks in Wall Street. If there was any premium on gold 
over other currency, it was veiled under the rate of exchange. 
The government itself replenished its stock of gold to some 
extent by offering to deliver notes in New York in exchange 
for gold deposited in other cities, and vice versa. The cost 
of transferring the funds was a premium on gold. 

On June 30, 1893, President Cleveland issued a call for an 
extra session of Congress expressly to repeal the Sherman 
Act. The time for meeting was August 7. A bill to repeal 

the silver purchasing clause was promptly 

?J!fcL'Sfg^^^^^^ p^ss^^ by t^^ K^^s^' by ^ .v^t^ ^^ 239 to 108. 

In the Senate there was a long delay, due to 
the lack of any rule for terminating debate. It seemed at 
one time as though the country was on the eve of some 
great change, in consequence of the revolutionary conduct 
of certain senators in refusing to allow a vote to be taken. 

been living from hand to mouth for several years before 1893, borrowing 
heavily on short time, hoping for a turn in their favor, helped for a 
while by the favorable conditions of 1891 and 1892, and finally brought 
to bankruptcy by the panic." — Taussig, pp. 138, 139. 

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But filibustering came to an end at last, and the repealing 
bill passed the Senate October 30, by 43 to 32. 

The consequences of the panic did not come to an end, 
however. The Treasury deficit was not checked by the 
repeal of the Sherman Act. The gold reserve had declined 
. from $99,000,000 in July, 1893, to $65,000,000 in January, 
1894. This was due, not to the presentation of notes for 
redemption, but to an excess of ordinary disbursements 
over ordinary receipts. The deficit was now running at 
the rate of $5,000,000 per month. The cash balance in 
the Treasury other than gold was only $12,000,000. The 
situation was alarming. 

At this juncture, some of President Cleveland's political 
friends, who had joined in repealing the Sherman Act, 
asked him to agree to a measure for coining, in advance, 
the seigniorage of the bullion purchased under 
slf^^oragf- that act. The whole amount of bullion pur- 
chased for $15^^000,000 would produce 218,- 
000,000 silver dollars. The difference between these fwo 
sums^'^fj ^ 2,000 ^000) would be seigniorage whenever the 
coinage should~take~^lace, but the Sherman Act had not 
contemplated the coinage of the bullion at any definite 
time. If t he seignior a^rejvere coined in adyajice, the new 
silver dollars would be in.theTreasury, and if paid out 
would aggravate_the_existing evil, like a new issue of green- 
backs or of any other fiat money. If not,paid out, people- 
would naturally ask why they had been coined. Moreover, 
coining the^eigniorage would have been interpreted as a 
sign of vacillation and weakness on the part of the Execu- 
tive and would have added to the prevailing panic. For 
these reasons Mr. Cleveland properly refused to give his 
assent to the proposed measure. 

When Congress met in regular session in December, 
1893, Secretary Carlisle laid before it the exact condition 

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of the Treasury, and recommended that his borrowing 
powers be enlarged and modernized by giving him authority 
to issue government obligations bearing 3 per cent interest 
and redeemable in one year. Such obligations would be 
akin to the Exchequer bills issued in emergencies by the 

British government. But Congress was in a 
^Conzreaa^^ °* sullen mood. The Democrats were angry with 

President Cleveland for compelling them to 
repeal the Sherman Act. The Republicans could see no 
objection to a family quarrel among their opponents or to 
the pecuniary embarrassment of the Administration. If 
the Secretary could extricate himself by means of existing 
laws, well and good ; otherwise the government might go 
to protest. Neither branch of Congress would lift a finger 
to prevent it. 

It was now necessary to do something decisive. Under 
the Resumption Act of 1875 the Secretary had power to 
sell any one of three classes of bonds for the purpose of 
beginning and continuing the redemption of United States 
notes. Another law, not noticed at the time, gave h im 
power t o buyjcoin atlTis disc retion and to pay for it _with an y 
bonds^iithorized^ b)^law! In I anga ry, i89^4,"TEeSec retary 

advertised, uoderjheact of 1 875, the s ale of 

B^d Sales in $5o,qoo^oQo_£Lf_s_per^cent bonds, to runjten 
years^audjobe sold at the rate of $1 17.223 
gold-lef^^ each $100,^ thus nialongtlie rate of interest equal 
to 3 per^.ee«t. These were taken mostly By the New York 
City banks. In this sale the element of coercion was not 
wholly wanting. The banks were not free to take the bonds 
or not, according to the attractiveness of the investment, but 
were obliged to consider what would happen to themselves, 
in common with the commercial world, if the loan should 
fail. When they looked at that side of the shield, they saw 
sufficient reasons for lending their money to the government 

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at 3 per cent. The sale brought in $58,660,917, and the 
Treasury gold reserve was carried up to $107,446,802 in 
March, but it did not remain there long. Gold exports 
began again in April and continued heavy till September. 
The withdrawals reduced the Treasury reserve to $52, 189,500 
in August. The Secretary was compelled to advertise a new 
s ale of $50,000,000 of bo nds. This was effected in Novem- 
ber, 1894, at 117.077, realizing $58,538,500, and bringing 
the Treasury reserve up to $105,424,569. 

The second loan did not have a soothin g effect. On the 
contrary, it convinced thejuihli c on both sides of ihe. water 
that the United States was nearing bankruptcy. In the 
midst of the trouble, a rumor gained acceptance in Wall 
Street that the Treasury officials were keeping a list of the 
persons who drew gold, intending to visit displeasure on 
them later. This was naturally interpreted as a sign of 
panic inside the Treasury. It augmented the panic outside 
and led to larger withdrawals of gold than would otherwise 
have taken place. In the ten weeks following the second 
loan, $80,000,000 gold was drawn from the Treasury. Of 
this sum $36,852,000 was exported, and the remainder, 
$43,148,000, was presumably hoarded. This was a run on 
the Treasury, the like of which had not been known before. 

The danger had come so rapidly that steps for a new 
loan had not been taken in time to ward off the crisis. 
There was a gloomy conference at Washington between 
the President, the Secretary and two or three bankers 
from New York. The President was told that another 
sale of bonds by advertisement would require at least two 
weeks' public notice and that, meantime, the Treasury 
would have suspended payments. The assistant treasurer 
in New York had, in fact, notified the Secretary that he 
could not hold out more than two days longer, as things 
were then going. President Cleveland did not believe that 

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he had legal authority to sell bonds in any other way than 
in pursuance of public advertisement and competing bids, 
but at this juncture, Mr. W. E. Curtis, assistant secretary of 
the Treasury, drew attention to the following clause of the 
Revised Statutes: 

Sec. 3700. The Secretary of the Treasury may purchase 
coin with any bonds or notes of the United States authorized by 
law, at such rates and upon such terms as he may deem most 
advantageous to the public interest. 

A sudden change came over Wall Street. Gold with- 
drawals from the Treasury, which in January had ranged 
from $1,000,000 to $7,000,000 per week, fell on the 2d of 
February to $67,000. News came from Washington that the 

President had made an arrangement with a 
of^iL^^^**^^^ syndicate of American and foreign bankers, 

under the statute above cited, to provide 
the Treasury with 3,500,000 ounces of gold coin, equal to 
$65,117,500; that at least one-half of this gold should be 
brought from Europe, at the rate of 300,000 ounces per 
month, and that the syndicate should "exert all financial 
influence and make all legitimate efforts to protect the 
Treasury of the United States against the withdrawals of 
gold pending the complete performance of this contract." 
The bond deliveries were to be made concurrently with the 
payments, and the terms of the contract allowed six months 
for its entire fulfillment. This signified that, besides replen- 
ishing the Treasury, the syndicate had undertaken to stop 
the export of gold for six months, or at least to use all their 
financial powers to that end. This coin was to be pur- 
chased with 4 per cent thirty-year bonds at 104.49, ^^ which 
rate the interest would be equal to 3I per cent. The syn- 
dicate, however, agreed to accept 3 per cent interest instead 
of 3 1 per cent, if Congress would make the bonds specifically 

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payable in gold. President Cleveland sent the contract to 
the House, with a recommendation that this change be made, 
saying that it would save the government $16,174,770 in 
interest payments during the time the bonds would run; 
but the House rejected the proposition, by 120 to 167. 

By this transaction the Treasury's gold reserve was 
brought up to $107,000,000, and the syndicate did actually 
prevent withdrawals from the Treasury for remittance abroad 
for four or five months, although the rate of exchange would 
have warranted gold shipments. This they accomplished 
by using their own credit in London and selling sterling 
exchange at the current rate. But tbeir ability to continue 
this operation depended upon the state of international trade 
in merchandise and securities, and eventually the demand 
for remittances on trade account became so heavy that they 
could not supply it. by thejr own credit merely. The with- 
drawals for export began again on a large scale in August, 
and the reserve was down to $j^,9, 000,000 at the beginning 
of December. ^ 

The syndicate operation of 1895 was assailed with vehe- 
mence in Congress, on the ground that the terms were too 
onerous to the government. This objection was urged for 
the most part by men who, by refusing to make the bonds 
payable in gold, had themselves added $16,000,000 to the 
public burdens. It is true that the syndicate loan was 
onerous, as compared with those immediately preceding, 
but the reason was that it came at a time when the public 
credit was at a low ebb.^ 

1 In a monograph entitled " Appreciation and Interest " {Publica- 
tions of the American Economic Association^ August, 1896), Professor 
Irving Fisher presents a table showing the rates of interest realized on 
silver bonds (rupee paper) and on gold bonds of the Indian government 
in the London market from 1865 ^^ '895. Until 1875 the difference 
was slight, not greater perhaps than might be accounted for by the 

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While the financial world was in the sensitive and strained 
condition indicated above, President Cleveland (December 17, 
1895) sent a* message to Congress on the subject of the 
boundary line between Venezuela and British Guiana. The 
message was construed as a threat of war against Great 

Britain in certain contingencies. There was 
Panic of 1895. . ,. ^ • . x.r n o. 

an immediate panic in Wall Street, accompa- 
nied by renewed exports of gold. The President again 
appealed to Congress (December 20) not to adjourn for the 
holidays without having "done something" to quiet th^ 
apprehensions of the public at home and abroad as to our 
financial soundness and honesty. Congress was willing to 
pay the expenses of a commission to determine the boun- " 
dary of British Guiana, but would do nothing to ward off 
national bankruptcy. The holiday recess took place as 
usual. Meanwhile the withdrawals of gold from the Treas- 
ury were increasing, $20,000,000 being taken in December, 
of which $15,000,000 was exported. In January the reserve 
had fallen to $49,800,000. 

On January 6, 1896, the Secretary of the Treasury adver- 
tised the sale of $100,000,000 of 4 per cent 
Bond^ie" 30-year bonds. The loan was largely over- 

subscribed and was taken at the average price 
of 1 1 1. 166, at which rate the interest was equal to 3.39 per 
cent. After the payments had been made, the Treasury 
reserve stood at $128,000,000. Exports of gold continued 
till August, when the reserve fell to $100,957, 561. This was 

preference of investors for payment in London instead of Calcutta. In 
1876 the decline of silver had become disturbing. ' Silver bonds sold 
at a rate which realized 4.1 per cent to the investor and gold bonds 
3.7 per cent ; in 1890 silver 4 per cent, gold 3 per cent ; in 1895, silver 
3.4 per cent, gold 2.8 per cent. The difference in the last-named year 
was 0.6 per cent, which was approximately the difference that the bond 
syndicate of 1895 offered to make between a gold bond and a "coin " 
bond of the United States. 

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within a small fraction of the sum turned over to Secretary 
Carlisle by his predecessor, Mr. Foster. Meanwhile the 
sum of $293,481,894 had been borrowed. The deficiency 
of revenue in the fiscal years 1894, 1895 and 1896 was 
$137,811,730, and the whole amount of money spent for 
silver bullion under the Sherman Act was $155,981,002. It 
is noteworthy that these two sums together equal the gov- 
ernment's borrowings, within a small fraction. If the diffi- 
culties of 1893-96 had been merely those of a deficiency of 
revenue, probably all parties would have cooperated to bring 
them to an end by means of increased taxes and a temporary 
loan. But since the standard of value, the principal political 
issue of the day, was involved in the solution of the fiscal 
problem, no such cooperation was possible. 

The Sherman Act provided that two million ounces of 
the bullion purchased should be coined into silver dollars 
each month until July i, 1891, and that thereafter only so 
much should be coined as might be necessary to provide 
for the redemption of the Treasury notes issued to buy 
the bullion. It provided also that the amount of Treasury 
notes outstanding should be neither greater 
Coinage of the nor less than the cost of the silver bullion 
thJxreasury. ^^d the silver dollars coined therefrom then 
held in the Treasury. Accordingly, when any 
Treasury notes were redeemed with silver dollars, it would 
be necessary to cancel them, in order to make the notes 
still outstanding equal to the silver still in the Treasury. If 
redeemed with gold, the notes would be reissued. As there 
is no provision for restoring canceled notes, it follows that 
the total amount of them in existence must be diminish- 
ing in exactly the ratio that redemption of them with silver 
takes place. This process, as explained in the preced- 
ing chapter, has. been accelerated by the acts of 1898 
and 1900. 

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Under the acts of 1878 and 1890 the purchases of silver 
were as follows : 

Silver bullion purchased under the act of February 28, 

1878, fine ounces 291,272,018 

Total coinage of silver dollars under said act .... $378,166,793 

Total cost of silver bullion used in such coinage . . . ^^^308,279,261 

Silver bullion purchased under the act of July 14, 1890, 

fine ounces 168,674,682 

Cost of same $155,981,002 

Silver dollars coined and to be coined there- 
from $218,000,000 

Less subsidiary coinage 20,000,000 


Total coinage of silver dollars under both acts .... $576,166,793 

The first section of the act of March 14, 1900, says that 
all forms of money issued or coined by the United States 
shall be maintained at a parity of value with the gold stand- 
ard, and that "it shall be the duty of the Secretary of the 

Treasury to maintain such parity." It does 
Act of 1900. \ ^ , , , . , 

not provide any means, however, by which to 

maintain parity. This omission is the more remarkable since 

the bill as originally reported and passed by the House 

contained a clause expressly for that purpose, namely : 

The Secretary of the Treasury is authorized and required to 
use said [gold] reserve in maintaining at all times the parity and 
equal value of every dollar issued or coined by the Government ; 
and if at any time the Secretary of the Treasury deems it neces- 
sary, in order to maintain the parity and equal value of all the 
money of the United States, he may at his discretion exchange 
gold coin for any other money issued or coined by the United 

The reasons for rejecting this clause must have been 
political rather than financial. Whatever they may have 
been, the effects were bad. The rejection implied that 

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the government itself shirked the task of keeping the silver 

dollar at par with gold, although it commanded the Secretary 

of the Treasury to do so. Whatever distrust 
Its Defect. . . ., ' , ... , • . , 

of the silver dollar existed in men s minds 

before must have been augmented by this action. 

The silver dollar is a larger kind of subsidiary coin, and 
should be treated by the government exactly as the smaller 
ones are treated. The government has received the value 
of a gold dollar for every silver one emitted, and is there- 
fore bound in equity to redeem the dollars as 

Direct Redemption it redeems the halves, quarters, and dimes. 

of the Silver ^ . . , ' ^ , , 

Dollar Desirable. It IS not Strictly necessary that the small 

change should be redeemed, but it is a great 
public convenience, as is shown by the fact that the redemp- 
tions amount to upwards of $32,000,000 per year.^ The 
government exists for the benefit of the people, and the cost 
of making the redemptions has been paid in advance by the 
seigniorage on the coins. 

There are additional reasons, however, for direct redemp- 
tion of the silver dollars. One is that such coins are unlimited 
legal tender between individuals. Another is that there is 
a certain amount of public apprehension and lack of con- 
fidence touching any coin which passes for more than its 
metallic value. This fear would be removed by direct redemp- 
tion of the silver dollar. If such redemption were provided 
for by law, it would never be availed of except in cases of 
necessity.. In such cases it would be universally desired. 


In 1873, by an act of Congress revising the coinage laws,' 
the silver dollar was omitted from the list of coins authorized 
to be struck at the mint of the United States. At that 

1 See Treasurer's report for 1900, p. 32. 

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time the metal in a silver dollar was worth more than loo 
cents gold. Any silver dollars previously coined remained 
full legal tender, but the metal silver was demonetized by 
that act. 

There was a gradual decline in the value of silver after 
1873. In 1876 the price had fallen so that the metal in a 
dollar was worth only 89 cents. There was a movement in 
Congress and a popular agitation to remonetize silver. A 
bill for this purpose was passed by the House in 1877, and 
was amended by the Senate so as to provide for a limited 
coinage of silver dollars from bullion purchased by the gov- 
ernment. In this form it became a law February 12, 1878. 
It did not remonetize silver, since it did not authorize the 
coinage of that metal in unlimited quantities for private 
persons. It was entitled " an act to authorize the coinage 
of the standard silver dollar and to restore its legal-tender 
character," but the phrase " standard silver dollar " was mis- 
leading, since the silver dollar had ceased to be a standard 
and was not made such by that act. The act remained in 
force about thirteen years. Under it the government paid 
$308,000,000 for silver bullion, from which it coined 378,- 
000,000 silver dollars, which it paid out of the Treasury 
at par. The seigniorage, or apparent profit, was about 

In 1890 the act of 1878 was repealed and another act 
was passed, enlarging the government's purchases of silver 
bullion and providing that payment be made with legal- 
tender Treasury notes, which should be redeemable in 
"coin." This act remained in force about three years. 
Under it the government issued its legal-tender notes to 
the amount of $156,000,000. Simultaneously with this act 
a bill was passed making changes in the tariff by which the 
revenues of the government were largely reduced, and a 
deficit became inevitable. 

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The output of legal-tender notes was accompanied by an 
exportation of gold of about equal magnitude. The reserve 
of gold in the Treasury known as the greenback redemption 
fund fell below the $100,000,000 mark in April, 1893. A 
financial panic ensued. It was succeeded by a severe and 
prolonged commercial crisis, during which it became neces- 
sary for the government to sell bonds on four different occa- 
sions to replenish its gold reserve. Congress was called 
together in extraordinary session in the summer of 1893 to 
repeal the silver act, and it did so. It refused, however, to 
take any other steps to improve the public credit, although 
repeatedly urged to do so by the President and the Secretary 
of the Treasury. The reason why it refused was that the 
standard of value was the leading issue in national politics. 
Anything' tending to improve the public credit helped the 
gold standard, which the majority in Congress at that time 
did not desire. 

The following statistics embrace facts of importance : 

Gold drawn from the Treasury by redemption of legal- 
tender notes in 14 years, 1879-92 inclusive .... ^^{43,3 10,887 

Gold drawn in 4 calendar years, 1893-96 483,538,788 

Gold exported during same period 344,248,036 

Borrowed by the government, same period 293,481,894 

Bonds issued, same period 262,315,400 

Bonds issued for gold redemption fund and interest 
thereon : 

Principal Interest 

jf5 1 00,000 ,000 at 4 per cent for 30 years, original loan (1878) ;S5 120,000,000 

50,000,000 at 5 per cent for 10 years {1894) 25,000,000 

50,000,000 at 5 per cent for 9 years (1894) 22,500,000 

62,315,400 at 4 per cent for 30 years (1895) 74»778,48o 

100,000,000 at 4 per cent for 30 years (1896) 120,000,000 

^362,31 5»400 . ^^362,278,480 

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The greenbacks are only $346,000,000 in amount, yet to 
keep them alive and to keep them equal to gold we have 
issued $362,000,000 of bonds and have obligated ourselves 
for $362,000,000 more in the way of interest. 

The silver dollar is at par with gold at the present time 
because it is not redundant. Moreover, the government 
receives it as the equivalent of gold in payment of all dues 
to itself. This is an indirect redemption, yet it cannot be 
depended on to maintain parity under all circumstances. 
If, by reason of bad times and slack trade, the quantity of 
silver dollars and certificates should be greater than the 
business of the country could absorb and find employment 
for, they would accumulate in the Treasury. Eventually the 
government's receipts would be wholly of silver and a panic 
of more or less severity would be the probable, consequence. 

Authorities for Chapters V and VI 

Noyes' Thirty Years of American Finance. 

Taussig's Silver Situation in the United States, 

Final Report of the Monetary Commission of the Indianapolis 
Convention (The University of Chicago Press, 1898). 

Dunbar's article on '* The Safety of Legal-Tender Paper " in 
the Quarterly Journal of Economics^ April, 1897. 

Dunbar's Collection of Laws of the United States relating to 
Currency^ Finance^ and Banking. 

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In its original sense the word "bank" means a heap, a pile, 
an accumi4ation, as bank of earth, sand bank, gravel bank. 
'* In colonial times it was applied to any batch 
oft^Term*'^*"' ^^ accumulation of paper money. Thus a 
"new Rhode Island bank" meant a new 
emission of bills of credit of that colony. In the early days 
of the American republic a bank was an association whose 
main business was the issuing of notes to circulate as 
money, and the phrase " banking privileges " meant the 
right to issue such notes. Daniel Webster even said that 
the power to issue notes to circulate as money was the 
feature which distinguished a bank from every other insti- 
tution. At the present time the issuing of notes is not a 
necessary function of banks, nor is it, in our large cities, 
the chief part of their business. 

A bank in the modern sense is a manufactory of credit 
and a machine for facilitating exchanges. It is commonly 
said that banking consists in (receiving money from depos- 
itors and lending it to borrowers.) This is the proper func- 
tion of a savings bank ; but it is only a part, and not the 
largest part, of the business of a commercial bank. The 
money deposited in such a bank forms only a portion of the 
assets which go to make up the bank's credit, which it issues 


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to borrowers, sometimes in the form of circulating notes 
payable to bearer, but oftener in the form of book entries 
transferable by means of checks. 

An analysis of modern banking is substantially this: A 
man has $10,000 of his own money. He starts a bank. 
His neighbors deposit $50,000 with him. This money 
becomes the absolute property of the banker. The depos- 
itors have simply a right to withdraw an equal amount 
whenever they like, which right can be enforced by law. 
The banker owns the money and the depositor has a claim, 
or right of action, against him for an equal sum. But the 
depositors will not draw the money out immediately ; if 

they had intended to do so, they would not 
cr^rt.'***'^'''^°* have deposited it at all. The banker finds 

by experience that some of his customers will 
bring in as much money as others draw out, so that $60,000 
is on hand all the time. He infers that if his own $10,000, 
in connection with his good reputation, is considered by the 
public a guarantee for $50,000, then the whole $60,000 will 
serve as a guarantee for a much larger sum. When he 
begins, his balance sheet reads in this way : 

Resources Liabilities 

Cash . . . $60,000 Capital . . . $10,000 

Deposits . . . 50,000 

$60,000 $60,000 1 

1 In keeping the accounts of a bank, or of any other business, the 
business itself is considered as indebted to the shareholders for the 
money they have put into it, and for all the profits earned but not paid 
to them. In the case we are now considering, although there is only 
one shareholder, the same rule applies. -The conception of a bank's 
capital as a liability is the pons asinorum of banking science. It can 
be understood best perhaps by observing how the assets of a failed 
bank are disposed of. The receiver, in such a case, represents the bank. 
Suppose that the assets realize more than the claims of all the creditors. 
The excess is paid to the shareholders because the bank owes them 
whatever remains after other claimants are paid in full. In short, there 

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The banker now begins to buy promissory notes, or bills 
of exchange, due at a specified time in the future, paying 
the face value of the same, minus interest at a certain rate 
for the intervening time. This is called discounting com- ' 

mercial paper. When he discounts for one 
^^S^Pawr*^™' ^^ ^^^ customers a note for $1000 running 

ninety days, he deducts the interest (say $15), 
entering the amount under the head of profits due to stock- 
holders, and writes the remainder, $985, on the credit side 
of the customer's pass book, entering a corresponding sum 
as a credit to that person's account in his own books. This 
credit is called a deposit, and properly so, since the net 
purport of the transaction is that the banker has bought an 
interest-bearing security and the seller has deposited the money 
he received for it in the bank, to be drawn out at his pleasure. 
If the customer had deposited J 1000 gold simultaneously with 

the foregoing transaction, his total deposit 

S^^"*' ""* ^°"^^ ^^^^ ^^^^ ^^9£5- Y^^ ^^^^^ ^s a differ- 
ence between the two kinds of deposits, the 
one being of money and the other a bank credit. In practice, 
the bank credits at any given time may be four or five times 
as large as the amount of cash in the bank. 

The process of discounting commercial paper continues 
until the banker has $200,000 of bills receivable in his port- 
folio. Then his account stands thus : 

Resources Liabilities 

Cash ^60,000 Deposits . $247,000 

Loans and discounts 200,000 Capital . 10,000 
Profit . . 3,000 

#260,000 ;5^26o,oooi 

are preferred claims (those of creditors) and ordinary claims (those of 
shareholders). Both are liabilities of the bank, and equally valid ones, 
in their proper order. 

1 Theory and Practice of Bankings by Henry Dunning Macleod 
(fifth edition), I, 324. 

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Thus the business venture called a " bank ** owes to depos- 
itors and to the banker himself $260,000 ; and it has assets 
which will produce that amount, but only $60,000 of it is 

cash. It follows that the banker has manu- 
cred'te ^ ^^ f actured something which serves as a medium 

of exchange to the extent of $197,000. This 
is credit. Goods can usually be bought and sold with it as 
readily as with money, since checks drawn against deposits 
are accepted in trade by the whole community. The whole 
$200,000 of bills are not discounted at one time, but gradu- 
ally, so that some are always maturing and bringing in 
money to meet the banker's liabilities. 

Alexander Hamilton saw clearly how a bank serves as a 
manufactory of credit, and how it economizes the use of cap- 
ital. He had a clear understanding of the nature of deposits, 
although there had not yet been published any scientific 
analysis of banking operations. In his report on the Bank 
of the United States he said : 

Every loan which a bank makes is, in the first shape, a credit 
given to the borrower on its books, the amount of which it stands 
ready to pay, either in its own notes, or in gold or silver, at his 
option. But, in a great number of cases, no actual payment is 
made in either. The borrower, frequently, by a check or order, 
transfers his credit to some other person, to whom he has a pay- 
ment to make ; who, in his turn, is as often content with a similar 
credit, because he is satisfied that he can, whenever he pleases, 
either convert it into cash, or pass it to some other hand, as an 
equivalent for it. And in this manner the credit keeps circulating, 
performing in every stage the office of money, till it is extinguished 
by a discount with some person who has a payment to make to the 
bank, to an equal or greater amount. Thus large sums are lent 
and paid, frequently through a variety of hands, without the 
intervention of a single piece of coin.^ 

1 Although this lucid conception of the philosophy of modem hanking 
was published in 1791, it was the task of Mr. H. D. Macleod (and not 

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The banker's deposits are payable on demand. In the 
case considered above, the depositors might have drawn 
. their checks simultaneously for $247,000, pay- 
c^is^^**^ able to persons who were not depositors in 
the same bank, in which event they could not 
all have been paid, although the bank would be eventually 
solvent. It would be able to pay in full, but not until its 
bills receivable should mature. Probably such a case as a 
simultaneous withdrawal of all deposits never happened in 
the world, but it is quite conceivable that the depositors 
might draw at once for more than $60,000, — that is, for 
more cash than the banker has on hand, in which case 
the bank would have to close its doors and go into 
liquidation, unless it could get help temporarily from 

Thus there is a limit to the banker's power of discounting 

commercial paper. He is limited by the probable calls of 

his depositors for money to be withdrawn from the bank. 

The amount kept on hand to meet such demands 
Bank Reserves. 

is called the cash reserve. This reserve is 

the banky in the original meaning of the term, — the heap, or 
pile, from which daily payments are made and upon which 
all the credit operations rest. The cash reserve may consist 
of any kind of currency which is commonly accepted. Its 
amount must be proportionate to that of the deposits. The 
right proportion can be learned only by experience and only 
approximately. It varies in different countries, and at dif- 
ferent places in the same country; and the local banker, 
as the person most thoroughly conversant with local condi- 
tions, has, as one of his most important duties, the ascertain- 
ment and preservation of that reserve which most nearly 
meets the needs of his community. 

an easy one) to systematize and bring it into general recognition and 
acceptance by economists more than half a century later. 

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Bank notes are the banker's promises to pay money to 
bearer on demand. They are virtually orders of the presi- 
dent and cashier on the paying teller. They 
Bank Notes. tr j o j 

are of the same nature, and they operate in 

the same manner as checks drawn by depositors. Checks 
and notes are equally lawful demands upon the bank's cash 

Now, suppose that the bank above mentioned has the 
right to issue circulating notes and that the customer, whose 
paper has been discounted, desires to use the proceeds in 
paying the wages of farm hands, or factory 
SiSre^s'c'hecks. operatives, or in buying country produce, or 
in other ways and in places where checks are 
not acceptable. He will ask for bank notes, in order to pay 
them to the wage-earners, farmers, etc. He might ask for 
gold, in which case the bank would be obliged to give it to 
him, but the notes are more convenient and will be generally 
preferred by the payees. The payees may demand gold 
from the bank for the notes, if they choose, but generally 
they will not do so. They will pay them to storekeepers 
or others to whom they are indebted, and the latter will 
deposit them in the issuing bank to their own credit, or in 
other banks which will send them to the issuing bank for 
redemption. Eventually they will be paid out of the bank's* 
cash reserve. They will be paid out of the same fund from 
whiclt the customer's checks would have been paid, if he 
had drawn the money by means of checks payable to order, 
instead of taking notes payable to bearer. 

The banker cannot decide whether the credit he has 
extended to his customer shall be used in the form of checks 
or in the form of notes. Nor does this question concern 
him in any way, except that the notes may stay out some- 
what longer than the checks. His liabilities are the same 
in either case. The only thing that need concern him is 

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the goodness of the paper which he bought when he issued 
his credit to his customer. The form of issue, whether in 

checks that may pass through one or two 
^A^T^^Uc^^^ hands, or in circulating notes that may pass 

through many hands, is of little consequence ; 
and, even if it were of much consequence, it is beyond his 
control. It is also b^^nd t_he co ntro l of_ the^ depositor. 
He_will call foji notes onl^in cases where he cannot use 
checks. The controlling forcejiere is _the public demand, 
to which both the banker and his_j:LU.stomers conform. JThe 
public demand determines also how longjhe notgs sh%ll stay 
out aft er th ey have be en iss ued. Nobody keeps more notes 
on hand than he needs. When a man finds that he has a 
surplus, he returns it to the bank. Thus the outflow and 
inflow of bank notes is automatic. 

While it is immaterial to the banker whether the credit 
which he issues shall take the form of checks or of notes, it 
is important both to him and to the community that it shall , 
take one form or the other, since^the alternative is the with- 
drawal of gold for purposes of circulation and the conse- 
quent lessening of his cash reserve ; and, as we have seen, 

the lessening of his reserve by $i.oo usually 
BankNotes lessens his ability to discount commercial 

paper by $4.00 or more. If it is for the "* 
interest of the community that the system of bank credits 
should exist at all, it should be available in the form 
of circulating notes, as well as of checks ; for banking 
science consists in the substitution of less costly instru- 
ments of exchange for more costly ones, according to the 
demands of trade. The bank note, since it is one of the 
less costly ones and is indispensable in the modern world, 
should be readily available as needed. Its utility is greatest 
in sparsely settled communities, where there are few or no 
banks. ■ 

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Bank notes were first issued in England in 1670 or there- 
abouts. They were instruments of writing executed by 

goldsmiths to people who had left money in 
BankNotef ^^^^ custody. Several of these notes were 

found in a back room of Child's Bank (the 

oldest of English banking houses) when it was removed 

from the vicinity of Temple Bar a few years since. The 

following are specimens : 

Nov. 28, 1684. 

I promise to pay unto ye Rt honble ye Lord North & Gray, 

or bearer ninety pounds at demand. 

For Mr. Francis Child & myself 

J no Rogers. 

Picture of ) ^t 

Temple Bar po-92i. , . r. . 

^ ' London, Oct. 20, 1729. 

I promise to pay to Mr. Richard Bannister, or order, on demand, 

twenty pounds. 

For Fras. Child, Esq. 

Sam Child. 
Picture of ) xt 
Temple Barf No 1792. , ^ ^ r. k 

^ ' London, 8 December 1729. 

I promise to pay to Mr. Chr. Diggs, or bearer, on demand thirty 


For Fras. Child & Co. 

Sam Child.^ 

Other similar examples of the origin and evolution of the 
bank note might be cited. The right to issue such notes 
was never questioned. They were simply evidences of claims 
to money deposited with the goldsmith or the bank. As the 
business grew, and the quantities of notes galled for by 
depositors increased, it became more convenient to print 
blank forms, to be filled out with the names of the depositors 
and of the amounts due them. Still later notes were printed 
1 Macleod, I, 283. 

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for round sums, — as, for example, five or ten pounds, — 
which could be handed in quantities to the persons entitled 
to receive them ; and these were made payable to bearer, or 
to order, according to the wish of the depositor. The busi- 
ness of discounting commercial paper was added to the 
goldsmith's vocation very soon after the practice of deposit- 
ing money with him became common, and then the notes 
were issued, if desired, to the persons getting the discounts. 
Thus the issuing of such notes became recognized as a 
right at common law. Anybody could issue them and put 
them in circulation, if people were willing to take them. It 
was found in course of time that the exercise of this right 
was exposed to accident and liable to abuse, 
A^commoii-Liiw \ ^^^ ^j^^^ ^j^^ g^^^^ ^^^^ interpose for the pro- 
tection of society. At first it was believed 
that such protection could be secured by restricting the 
issue of circulating notes to a select number of persons of 
well-known character, generally, but not always, incorporated 
as a bank. Thus certain charters granted to banks in this 
country before the adoption of the federal constitution (the 
Bank of North America in Philadelphia, the Bank of Massa- 
chusetts, and the Bank of New York, which still exist) 
contain no mention of circulating notes, since the right to 
issue them existed without legislative authorization. The 
Bank of New York began business and issued circulating 
notes seven years before it received a charter. 

In the public discussions of recent years the question has 
frequently been asked why the banker should receive inter- 
est on his outstanding notes, while the customer 

Why Interest is p^ys interest on the note which he *gave in 
paid for the Use . . , * , , , . i r ^ 

of Bank Notes. exchange for them. As both kmds of notes 

are debts, why should one of these two 
persons pay interest more than the other ? There is, how- 
ever, a vital difference between the two kinds of notes. The 

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banker's notes are payable on demand. Any person into 
whose hands they come may demand gold for them imme- 
diately. If he does not do so, it must be because he finds 
the notes better adapted to his immediate wants. The 
customer's note, on the other hand, is not payable till a 
fixed time in the future. It is said in rebuttal that the right 
to issue notes to circulate as money has been conferred 
upon one of these parties by statute, and that he has thus 
been given an artificial advantage. This is an error ; for, 
as we have seen, the statute, instead of conferring a right 
on the banker, has curtailed a preexisting right. 

Society derives an advantage from the banker's operations 
which it can well afford to pay for, whether the credit which 
he issues takes the form of deposits and checks, or of cir- 
culating notes. The discount of commercial paper has 
been aptly defined as " the swapping of well 
How Banks aid known Credit for less known credit." The 

in the Work of , , ,- i f t . ^' rw^t 

Production. bank first establishes its own credit. Then 

it is the banker's business to find out what 
persons in the community are worthy of its credit. Credit 
enables persons to obtain the use of capital, which they 
could not otherwise acquire. For the present purpose 
capital may be defined as anything which aids man to 
produce wealth and is not gratuitously bestowed, such as 
tools, materials, food, etc. The banker, if he understands 
his trade, enables the most deserving persons in the com- 
munity to get capital, — that is, to get possession of the tools 
and materials of industry without the use of money. The 
most deserving persons, in the commercial sense, are those 
who can make the most profitable use of tools and materials, * 
and who are believed to be honest. By swapping its well 
known credit for their less known credit the bank performs 
a service which they are willing to pay for, and it performs 
a service to society by economizing tools and materials. 

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Anything which puts these things into the right hands and 
keeps them out of the wrong hands is a gain to the world. 
The continuing life of a bank is presumptive evidence that 
it is doing this thing, for, if it were -not, its own losses and 
expenses would eat it up. 


A bank is an institution where deposits of money are 
received and paid, where credit is manufactured and ex- 
tended to borrowers, and where the exchange of property is 
facilitated. Having first acquired the confidence of the com- 
munity, the bank extends its credit by purchasing interest- 
bearing securities, mainly business men's notes, payable at 
a fixed time and giving the sellers the right to draw checks 
upon itself payable at sight. The amounts thus authorized to 
be drawn are termed deposits, the bank being liable for them 
in the same way as for actual money deposited. It is found 
in practice that a bank may safely extend its credit to an 
amount much larger than its cash on hand, the excess being 
an inexpensive but useful addition to the world's instruments 
of exchange. 

A bank requires a certain amount of money over and 
above its deposits as a capital, to secure and hold the con- 
fidence of the community and to meet unforeseen emer- 
gencies in business, but there is no definite proportion 
between capital and deposits Established either in law or in 
practice. The capital invested is one of the liabilities of 
the bank, but as a lien on the assets is secondary to the 
claims of creditors. 

Bank notes are the bank's promises to pay money to 
bearer>on demand. They are the president's checks on the 
bank, and are payable out of the cash reserve, the same as 
checks drawn by customers. When the bank extends its 

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credit to a customer, it is of little consequence whether the 
credit shall be used in the form of checks or of notes. The 
bank's liability is the same in either case, but notes usually 
remain in the hands of the community somewhat longer 
than checks. 

Bank notes were originally instruments of writing, executed 
by goldsmiths or other persons, promising to return the specific 
sums of money lodged with them. The right to issue them 
was consequent upon the right to receive the money deposited, 
and thus became recognized as a right at common law. In 
the early years of our government the right of a bank to exist 
carried with it the right to issue circulating notes. At present 
the right to issue notes is restricted in various ways in all 
civilized countries. For wholesale and for many kinds of 
retail^ trade bank checks are the most convenient means of 
payment, but for paying wages or carrying on some kinds 
of business notes are preferred. It is the public demand, 
not the preference of either the banker or his customer, that 
decides what proportion of payments shall be made with 
checks and what with notes. The public demand also deter- 
mines how long the notes, when taken out of the bank, shall 
remain in circulation. Bank notes are most useful in rural 
communities where banks are few and population is sparse. 


Macleod's Theory and Practice of Banking, 

Dunbar's Chapters in the Theory and History of Banking, 

Conant's History of Modern Banks of Issue, 

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A BANK Statement is an accounting, either voluntary or 
compulsory, rendered by the bank^s officers to its share- 
holders, which is published for general information. The 
bank, as an institution, is liable for all balances which have 
accrued against it in the course of business and is also liable 
to the shareholders for the capital and for all profits, whether 
carried to the surplus fund or not. Thus there are two 
kinds of liabilities, though they are generally put under a 
single head. We will, however, separate them for the sake 
of clearness, taking for illustration a statement of one of the 
national banks of New York City dated September 30, 1901. 


1. Loans and discounts ^^548,7 19,2 12.94 

2. Overdrafts, secured and unsecured 32,507.06 

3. United States bonds to secure circulation .... 50,000.00 

4. Stocks, securities, etc 309,720.99 

5. Banking house, furniture, and fixtures . . . " . . 1,41^,250.00 

6. Other real estate owned 14,667.85 

7. Due from national banks S.904>767.29 

8. Due from state banks and bankers 373>772.55 

9. Checks and other cash items 361,627.10 

10. Exchanges for clearing house 5,011,772.87 

11. Notes of other national banks 11,500.00 

12. Lawful money reserve in bank, viz. : 

Specie ;?} 11, 90 5,4 13.29 

Legal-tender notes 2,297,826.00 


13. Redemption fund with United States Treasurer 

(5 per cent of circulation) 2,500.00 

14. Due from United States Treasurer, other than 

5 per cent redemption fund 1 6,000.00 

Total #76,425,537.94 


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To Creditors 

15. Individual deposits . ^29,923,255.97 

16. Due to other national banks 26,368,474.36 

17. Due to state banks and bankers 7,905,820.09 

18. Due to trust companies and savings banks . . . 4,372,752.72 

19. Demand certificates of deposit 135,205.69 

20. Certified checks 906,907.57 

21. Cashier's checks outstanding 794>499'40 

22. National bank notes outstanding 49,500.00 

To Shareholders 

23. Capital stock paid in 2,000,000.00 

24. Surplus fund 2,500,000.00 

25. Undivided profits, less expenses and taxes paid . . 1,468,657.14 

26. Dividends unpaid 465.00 

Total ^^76,42 5,537.94 

I. Loans and discounts consist chiefly of promissory 
notes, drafts, and bills of exchange, running for short 
periods — say, two to four months — executed 
Discou^ by men engaged in active business. As the 

liabilities of a commercial bank are payable 
on demand, it cannot safely make loans for long periods, 
although it may renew short ones from time to time. Promis- 
sory notes oiay be executed by one person, firm, or corpora- 
tion and offered for discount without other security. Such 
notes are called single-name paper. A promissory note 
drawn by A to the order of B, indorsed by the latter and 
offered for discount, is called double-name paper, since 
both A and B are held for the payment of it. 

Such paper, whether single or double-name, may or may 
not have its origin in a sale of goods on time, for which 
the seller wishes to obtain the money at once. If it does 
not take its rise in any business transaction already con- 
cluded, it is called accommodation paper. Bankers have 

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no absolutely certain means of knowing whether a note 
represents a concluded transaction or an intended one. 

They are justly suspicious of accommodation 
Pa^r*™**^**^*^ paper, yet the difference between such paper 

and other unsecured notes is not so great as 
it seems. Both are loans on personal security, since in 
neither case has the banker a lien on any particular goods. 

The essential distinction between real and accommodation bills 
is that one represents past and the oihtr future transactions. In 
a real bill goods have been purchased which are to meet the bill ; 
in an accommodation bill goods are to be purchased which are to 
meet the bill. But this is no ground for preference of one over 
the other. A transaction which has been done may be just as 
wild, foolish, and absurd as one that has to be done. The inten- 
tion of engaging in any mercantile transaction is that the result 
should repay the outlay with profit. There is no other test of its 
propriety but this, in a mercantile sense. The true objections to 
accommodation paper are of a different nature. As real bills 
arise out of the transfers of property, the number of them must 
be limited in the very nature of things. However bad and worth- 
less they may be individually, they cannot be muhiplied beyond a 
certain extent. There is therefore a limit to the calamities they 
cause. But accommodation bills are means devised to extract 
funds from bankers to speculate with, and consequently these 
speculations may be continued as long as these funds can be 
extracted. 1 

The Scotch banks have a system of " cash credits " which 
consist largely of accommodation paper. There are ten 
banks in Scotland, with about nine hundred branches, 
bringing at least one branch within reach of every hamlet 
in the country. The cash credits are authorizations granted 
to persons to draw a maximum amount of money from the 
bank within a given time and returnable within a given 

1 Macleod, I, 308. 

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time, interest to be paid only for the amount drawn and the 

time it is kept out. These are loans on personal security, 

never less than two names being required, generally three 

or more. — A-Very large percentage of the 
** Cash Credits. " j o r o 

cash credits of the Scotck banks are made to 

the agricultural classes, but they are notjmade on mortgage 

security and they are not allowed to stagnate. The cash 

credits are entered as deposits on one side of the bank^s 

ledger — that is, under the head of liabilities. On the other 

side they appear under the title "bills discounted, cash 

accounts and other advances," as resources. 

Drafts and bills of exchange payable at a future time and 
purchased by the bank are included under the head of loans 
and discounts. In this country the two terms signify the 
same thing, except that the word " draft " is 
T^c^ngT' ^PPli^^ t^ instruments payable at some dis- 
tance from the drawer but within the United 
States, and the term " bill of exchange " to those payable in 
foreign countries. They are orders in writing, drawn upon 
the custodian of funds belonging to the drawer or for the 
payment of goods sold to the drawee. 

A draft or bill of exchange is usually made payable to the 
order of a third person. If not payable at sight, it must be 
presented to the drawee as soon as possible, and he must 
write the word " accepted '^ on it and sign his name there- 
under ; otherwise it must be at onqe protested for non- 
acceptance. Then two persons are responsible to the 
holder of it. If the holder gets it discounted at his bank, 
he must indorse it, and thus he also becomes responsible 

for it. It may go through several hands, 

each holder indorsing it before he parts with 

it. It acquires strength with each transfer, since all the 

persons who have indorsed it are successively responsible 

for its payment. These are the most important circulating 

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instruments of modern commerce, since nearly all the 
wholesale transactions of the world are effected by them, 
and since they range over the whole world and are not 
limited, like bank notes, to their parent country. Two or 
more bills of exchange may be in existence at one time 
touching one lot of goods, since it is the transfer and not 
'the creation of them that gives rise to the bills. The chief 
business of banks is to discount bills of exchange, so that 
the maker or holder may have the present value of them 
in cash. 

Bills of exchange are sometimes accompanied by bills of 
lading, warehouse receipts, stocks or bonds, which are spe- 
cific titles to property, the bank having a lien 

BiUs of Lading. , ., t , -n • • 1 rr.. 

on the property until the bill is paid. These 
are simply a superior kind of bills. They command a lower 
rate of interest because of their higher security, and in a 
stringent money market they will command money when 
other bills are refused. All other discounted bills are loans 
on personal security. 

Another variety of bills of exchange arises from the use of 
letters of credit. These are instruments of writing issued 
by a bank, authorizing the holder to draw upon the issuing 
bank or upon some affiliated institution, at sight or other- 
wise, and within a definite period of time, not exceeding in 
the aggregate a certain sum. It is stipulated in the body 

of the instrument that the amount of all 
Letters of Credit. , . , .,, r , . t , 

drafts, or bills of exchange, negotiated under 

it shall be indorsed upon it, so that it shall always show 
how much of the credit remains unexhausted. The names 
of the banks or persons in various parts of the world (corre- 
spondents of the issuing bank) who will cash or discount 
the drafts so drawn are printed on it. A large part of the 
foreign purchases made by merchants is effected through 
bills of exchange drawn under letters of credit. - Such 

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letters are also much used by tourists to pay their traveling 

2. Overdrafts, secured and unsecured, constitute an item 
in nearly all bank statements. Strictly speaking, they ought 
not to be there at all, but it sometimes happens that a depos- 
itor overdraws his balance by mistake. In such a case the 
bank's officers exercise their discretion, based upon their 
knowledge of the man's character and resources, in deciding 
whether they will pay the check which overdraws the balance 
or not. Until the overdraft is made good or is proved uncol- 
lectable it is properly reckoned as an unpaid debt among 
the bank's resources. 

3. United States bonds to secure circulation will be more 

fully considered in the chapter on the national 
llnls.^^^'' banking system. It may be remarked at 

present that this item of $50,000 among the 
resources is offset in large part by the outstanding circulating 
notes ($44,520) among the liabilities. 

4. It is desirable that a bank should have a portion of 
its interest-bearing assets so invested that it can be quickly 
turned into cash to meet a sudden emergency. This is 
especially needful in the case of a bank which holds large 
sums deposited by other banks, since a financial disturbance 
occurring in a distant quarter may bring sudden demands for 
cash from these depositing banks. Stock exchange securi- 
ties are held by banks, partly because they 

other Interest- can be sold at short notice to meet such emer- 

Bearing Securi- . , . 

ties. gencies, partly because opportunities occur to 

bankers for acquiring them at low prices, and 

sometimes because they have been compelled to take the 

securities for debts, which would otherwise have been lost. 

5. Banking house, furniture, and fixtures are proper 
resources of a bank ; for, if it does not own such property, 
it must pay rent to others for equivalent accommodation. 

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6. Commercial banks do not usually lend money on the 

security of real estate. Under our national 
Real Estate. 

banking law they are not allowed to do so, 

but they may take such property for unpaid loans previously 

made in good faith. 

7, 8. There is always a current account between banks 

for collections which they make for each 
BankT""^*^*' other. They also lend and borrow among 

themselves and deposit money with each 
other for the sake of interest. 

9. Checks and other cash items include checks and drafts 
on private banks in the city not members of the clearing 
house, and small advances, payable on demand, which do 
not go into the category of loans and discounts. 

10. Exchanges for the clearing house are the checks, 
drafts, and other claims on other banks, members of the 
clearing house, which have not yet been collected. 

11. Notes of other national banks are put in a place sep- 
arate from the other cash, because under the national bank- 
ing law they cannot be counted as a part of 

Notes"*^^*"' the legal reserve. For this reason the banks 
do not keep any large amount of bank notes 
on hand. They pay them out on checks, or send them to 
Washington for redemption in lawful money. 

12. These items constitute the bulk of the bank's cash 
reserve, amounting all together to $14,203,239.29. The legal 
reserve may consist of gold, gold certificates, legal-tender 
notes, silver, and silver certificates. The banks keep very few 

silver dollars and not more subsidiary silver 
ReleTve ^^^^ ^^ needed for making change or meeting 

the demands of customers. The use of silver 
certificates, however, is increasing, since they are the only 
paper currency of denominations less than $10 that can be 
obtained in large amounts. 

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13. The national banking law requires that every bank 
which issues circulating notes shall keep a deposit of lawful 

money in the Treasury of the United States 
dempti^rFund. ^^"^^ ^^ 5 per cent of the amount thereof for 

the redemption of the same. This deposit 
may be counted as a part of the bank's legal reserve. 

14. There is nothing to indicate what this sum may 
represent. Money is constantly passing between the banks 
and the Treasury. This item may represent subsidiary 
coins sent to the Treasury for redemption but not yet 
redeemed, or it may be money sent for the purchase of 
subsidiary coins not yet received. 

15. The first item of liabilities is individual deposits, 
which have been sufficiently explained in the preceding 

16. 17, 18. Under the national banking law country banks 
are allowed to keep three-fifths of their legal reserve in cer- 
tain city banks approved by the comptroller of the currency. 
We may infer from the magnitude of the sum " due to other 
national banks " that this is one of the city banks so approved. 
Apart from this provision of law it is customary for country 

banks to keep considerable sums on deposit 
Deposits^**^^ in city banks, for the convenience of making 

remittances for customers and also for the sake 
of the interest allowed by the city banks, which is usually at 
the rate of 2 per cent per annum. It has been a question 
much disputed in this country whether it is good banking 
practice to allow interest on such deposits payable on 
demand. It has been argued, in opposition to it, that it tends 
to the accumulation in the city banks of large sums which 
are liable to be called for suddenly whenever anything unu- 
sual happens in financial circles elsewhere. Such deposits 
are said to be in a high degree "explosive," tending to 
cause panics, or to aggravate them when they come. But 

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it is argued, on the other hand, that somebody will always 
be found to pay interest on deposits. If the banks do not, 

the trust companies and private bankers, who 
DeMsrts°° keep their deposits in the city banks, will do 

so ; and they will draw their own deposits 
to meet the calls of the country banks as suddenly and as 
freely as the country banks themselves would. The deposits 
will then be as " explosive " in the one case as in the other. 
Therefore the question to be considered is whether the city 
banks shall reap the profits which arise from the deposits of 
the country banks or allow other parties to do so. The 
same principles apply to the deposits of state banks and 
trust companies, etc. 

19. Demand certificates of deposit are merely a change ' 
of form of ordinary deposits for making remittances, or for 
the use of travelers within the range of territory where the 
credit of the issuing bank is known. John Doe, in New 

York, for example, wishes to remit money to 
Depo^?*^*''* Richard Roe, in some town in which John 

Doe's bank has no correspondent or on which 
it does not draw. He cannot get a draft payable in that 
town, but a bank's certificate, payable to the order of Richard 
Roe, will answer the purpose equally well. Accordingly, 
John Doe draws a check against his own deposit and asks 
the bank to change the form of it into a certificate. 

20. Certified checks are virtually certificates of deposit in 

another form. They aiie the checks of depositors on which 

the payiner teller of the bank has stamped the 
Certified Checks. f ^ ... , , , -r. 1 „ 

words : " Certified by the Bank and 

placed his initials or some device recognizable by the other 

banks. A check so certified becomes the obligation of the 

bank in the same sense as a certificate of deposit. The 

amount is immediately charged against the account of 

the drawer. 

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21. The cashier of a bank draws checks on the paying 

teller for the purchase of securities from bill brokers, stock 

brokers, and others. The sellers deposit these 
CasMer's Checks. 

checks in their own banks, and they are settled 

at the clearing house like other checks. 

22. The circulating notes of this bank are a very small 
part of its total liabilities. This subject will be more fully 
treated in the chapter on the national banking system. 

23. 24. The capital of a bank is primarily a guarantee 
fund contributed by the shareholders to give it stability and 

to create confidence in its soundness. A 
Surplus*"^ bank might exist in fair weather for some 

considerable time without capital, and many 
attempts have been made by speculators to realize that 
ideal, but any bank so launched has generally succumbed to 
the first financial gale. The surplus is a portion of the 
bank's profits not divided among the shareholders but 
set aside as a permanent addition to the guarantee fund. 
Under the national banking law the accumulation of a Sur- 
plus equal to 20 per cent of the capital of each bank is 
made compulsory. Before the declaration of a dividend 
one-tenth of the net profits must be deducted and set aside 
for that purpose until that percentage is reached. For all 
banking purposes the surplus becomes an integral part of 
the capital. 

25, 26. A bank statement must always show the amount 
of the accrued profits not yet divided. Dividends are usually 
paid the same day that they are declared, but it sometimes 

happens that shares of stock have changed 
Profits. , J , , .,,.,... ^ 

hands or have been mvolved in litigation, or 

that the owners have died since the last payment was made. 

In such cases the money remains in the bank awaiting the 

rightful claimants, and appears among the liabilities as 

"dividends unpaid." 

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A bank statement is an exhibit of the bank's resources 
and liabilities made by the officers to the shareholders, to 
the depositors, and to the public generally. The resources 
and the liabilities are placed in separate columns. The 
resources consist of all the money in the bank, all the 
things feceived in exchange for money, and all the claims 
it holds against others. The liabilities embrace all that 
it owes to depositors and other creditors, all the capital 
contributed by shareholders, and all earnings undivided or 
unpaid. . Therefore the amounts of the two columns should 
be exactly equal. If the inventory of the resources and the 
value placed upon them by the officers are correct, the 
statement shows the exact financial condition of the bank. 

The national banking law requires each bank to make 
at least five statements each year showing its condition 
at dates already past, which shall be designated by the 
comptroller of the currency. No bank can know before- 
hand what date will be chosen by him. Consequently no 
special preparations can be made. The statements must be 
written on blanks furnished by the comptroller, which go 
much more into details than those published in the news- 
papers. The fact that these statements must be made, and 
that they will be closely scrutinized by other bankers, as well 
as by experts in the comptroller's office, operates as a spur 
and incentive to correct methods and honest management 
on the part of each individual banker, but is not an absolute 
guarantee thereof. 

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The functions of a bank as a machine for facilitating 
exchanges are shown on the most extensive scale in the 
operations of the clearing house. This is 
of^ciearine* an association of banks whose primary object 

is to settle the claims which the members 
hold against each other. If there were only two banks in 
a particular place, there would be no need of a clearing 
house. Two clerks would meet at regular intervals, at the 
banking house of one or the other, and compare the claims 
that each held against the other. If Bank A held checks, 
drafts, etc., for $10,000 drawn on Bank B, while the latter 
held only $9000 drawn on the former. Bank B would pay 
$1000 to Bank A and the checks, drafts, etc., would be 
mutually surrendered. A clearing house merely enables 
any number of banks to settle their balances in about the 
same time that two banks could do so, the clearing house 
being, for this purpose, the only creditor and the only debtor 
of each bank. 

The clearing-house system was first introduced in New 

York in 1853. Prior to that time it had been customary 

for each bank to send a messenger to every 
The Old System. , , , , , .,, i_ , , 

Other bank each day with a pass book and a 

package of claims. Thus, Bank A would sort out all the 

checks and other claims it held against Bank B and, writing 

the amount in the book on the debit side of the page 

assigned to that bank, would send the book and package 

\ 240 

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to" the latter. Bank B would acknowledge receipt of the 
checks and write on the credit side of the page the amount 
of its claims on Bank A, delivering by its own messenger 
the corresponding checks, etc., drawn on Bank A and hav- 
ing the proper acknowledgment made on its own pass book. 
As there were thirty-eight banks in New York at that time, 
there were seventy-six bank messengers continually travers- 
ing the streets, getting in each other's way and in the way 
of the bank's customers, and liable to assault or accident. 
The balances were shown each day by the footings of the 
pass books but, on account of the labor of carrying and 
counting gold coin, which was the only money receivable 
between banks, the settlements were made only once a week, 
and then by actual delivery of the coin, which was also car- 
ried in bags through the streets. 

Now there are sixty-two members of the New York clear- 
ing house, including the assistant treasurer of the United 

States ; but one member is temporarily under 
CteM^^House suspension. There are also seventy-nine 

banks and trust companies in New York 
and the vicinity, not members of the clearing house, that 
clear through other banks. The Union Trust Company, 
for example, makes an arrangement with the Bank of 
Commerce, by which all checks drawn on the former may 
be presented at the clearing house to the settling clerk of 
the latter and be treated by the latter exactly like checks 
drawn on itself. In this case the Bank of Commerce is 
responsible to its fellow-members of the clearing house for 
checks drawn on the Union Trust Company in the same way 
as for its own checks. Accordingly, it may happen that any 
bank may go to the clearing house with checks and drafts 
drawn on one hundred and thirty-nine different institutions, 
which it has received the previous day from its depositors 
or through the mail from its correspondents elsewhere. 

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In order to expedite the work, it must separate these 
checks into not more than sixty-one packages, one for each 

member of the clearing house upon which it 
^i^ciearing! holds any, and prepare a schedule showing 

the total amount of its claim on each bank. 
It must also have a debit ticket to be delivered to each — 
showing, for example, that Bank A has a total claim on 
Bank B for so much money. It must also come to the 
clearing house with a statement showing the aggregate of 
all its claims on all the banks. This, which is its claim 
against the clearing house for that day, is handed to the 
manager of the clearing house or to the proof clerk immedi- 
ately upon entering. All these things must be done before 
the operation of clearing begins. 

Each bank sends to the clearing house a delivery clerk 
and a settling clerk. The settling clerks occupy seats in 
three parallel rows running lengthwise of the clearing room, 
each one having a sufficient amount of desk room for his 
work. The delivery clerks, with their packages of checks in 
separate envelopes, stand in an open space in front of the 
settling clerks. 

All are expected to be in their places about ten minutes 
before lo o'clock in the morning. At two minutes before 
lo the manager of the clearing house strikes a bell; and, 
if any clerk is not in his place at that time, he is fined $2. 
The next movement is made with the precision, and with 
something of the appearance, of a military drill. At exactly 
10 o'clock the bell is sounded a second time. Each 

delivery clerk then hands to the settling clerk 

in front of him the package of checks, etc., 
drawn upon the latter's bank, and at the same time drops 
the debit ticket, which shows the aggregate amount of such 
claims, into an aperture in the settling clerk's desk. The 
delivery clerk then takes one step forward and repeats the 

Digitized by VjOOQIC 


operation with the next settling clerk, and so continues until 
he has handed out all his packages and tickets. Usually this 
part of the operation is completed in ten minutes. Mean- 
while the proof clerk, who occupies a desk near the manager, 
has entered the claims of each bank under the head " Banks 
Cr." on a schedule like that shown on page 244. 

Inasmuch as the amount of each bank's claim against the 
clearing house (entered. under the head "Banks Cr.") is the 
sum of all the tickets which its delivery clerk has pushed 
into the letter boxes of the other banks, it follows that all 
the tickets of all the banks should equal all the entries under 
that head. The next step in the operation is for each set- 
tling clerk to arrange the amounts of all his debit tickets 
in a column, add it up, and send the amount to the proof 
clerk, who transcribes and arranges it under the head 
" Banks Dr.,** so that the debit of Bank A shall be on the 

same line with its credit. Then the differ- 
The Result. 

ence between the two will show how much 

the bank owes the clearing house or how much the clearing 
house owes the bank. The time occupied by the settling 
clerks in arranging their tickets and adding up the columns 
is about half an hour. As fast as these footings are com- 
pleted, they are sent to the proof clerk, who puts them in the 
debit column opposite the credits of the banks respectively. 
When all are completed, if no error has been made, the 
footings of the credit and debit columns must be exactly 
equal, and the footings of the columns, which show the 
differences, must be exactly equal. Then these differences 
are read off slowly and distinctly by the manager, so that 
each settling clerk can write down the sum that his bank 
has to pay or to receive. 

As time is money at the clearing house, somebody is fined 
for every error, for every delay in making footings, for 
disobeying the orders of the manager or for any disorderly 

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conduct. Forty-five minutes from 10 o'clock are allowed 
for completing the proof. For all errors remaining undis- 
covered at 1 1. 15 the fines are doubled, and at twelve o'clock 
quadrupled. The highest fine for an error discovered before 
1 1. 15 is $3. 

The table on the prebeding pages is an exact copy of a 
proof sheet of the New York clearing house. It is obvious 
that it makes little difference, as regards the time and labor 
required to effect the clearings, whether the amount cleared 
is large or small. The clearing house is thus seen to be one 
of the great labor-saving machines of the modern world. 

Payments of clearing-house balances are made with gold 
coin, gold certificates, or legal-tender notes. Gold certificates, 
when not otherwise defined, are those issued by 
MPaymenf^"' the United States Treasury; but some clear- 
ing houses which # have vaults receive gold 
deposited by their own members and issue certificates which 
are available in making payments at the clearing house or 
between members, but cannot be transferred to non-members. 
Four-fifths of the payments at the New York clearing house 
are made with clearing-house gold certificates. The debtor 
' banks must pay what they owe to the clearing house before 
1.30 P.M., after which the clearing liouse pays the same 
money to the creditor banks. The clearing house is not 
responsible for the goodness of the checks, drafts, etc., 
which pass through it, but each bank is responsible to its 

The clearings of the New York clearing house now average 
$254,000,000 perday and the balances, paid in about 1.30 p.m., 
as above described, average $11,600,000 per 
cie^t^""^ day, or a little less than 5 per cent of the 
clearings. It follows that about 95 per cent 
of these transactions offset each other. The New York 
clearings are, in point of magnitude, about two-thirds of 

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all the clearings in the United States, since New York is 
the place where other American cities most commonly settle 
their balances with each other. 

The members of the clearing house determine what kind 
of claims shall be admitted to the clearings. Usually these 
are checks, drafts, and certificates of deposit, 
McLThiT.*'*^ which are payable at sight or have already 
matured. Yet the practice is not uniform. 
Some clearing houses admit also the promissory notes and 
acceptances of private individuals which are drawn " payable 

at the Bank " and have matured. Others admit checks 

and drafts drawn on out-of-town banks which are corre- 
spondents of members of the clearing house. In some 
clearing houses payment of balances may be made by drafts 
drawn on other designated cities, or partly in cash and 
partly in such drafts. In Boston the practice exists of 
borrowing and lending balances among the members, on 
the floor of the clearing house, immediately after the day's 
balances are ascertained, and 60 per cent of the balances 
are usually disposed of in this way. Thus, suppose that a 
certain bank has a credit balance of $100,000 at the clearing 
house for which it has no immediate use. In order to save 
interest on this sum even for a single day, it lends its 
balance to a debtor bank "on call" — that is, repayable at 
demand. The creditor bank, in that case, gives an order 
in writing to the manager of the clearing house to transfer 
so much of its balance to the borrowing bank. This practice 
is so common in Boston that the clearing-house rate of inter- 
est is quoted regularly in the newspapers. 

The clearing-house association is well fitted for the per- 
formance of other duties than those of ascertaining and 
settling balances among the members. It is especially 
qualified for the task of checking financial panics. It 
sometimes happens that the demands of depositors for 

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currency are so great that the cash reserves of the weaker 

banks are at the point of exhaustion, rendering them liable 

to suspend payments. As the suspension of one bank at 

^ such a time may lead to excessive demands 

L^n'lDertffl^tes. "P^" ^^^^^ ^^"^» Causing them to suspend 
also, it is necessary to grapple with the crisis 
before it becomes unmanageable. The banks therefore 
unite, through the clearing house, in the issue of " clearing- 
house loan certificates," in order to avert general disaster. 
There have been five crises in which the New York banks 
have adopted this method — and in the later cases with very 
complete success. The last one was in 1893, and a descrip- 
tion of the process in this case will make clear the principles 

In June of that year the panic described in a previous 
chapter began.* The immediate consequence was the rapid 
withdrawal of deposits from the banks. Obviously, if all 
the deposits of a bank are demanded in this form at once, 
they cannot be paid out of a reserve which is 
Rwe^es!^ '*^^ usually only one-fourth of that sum. But 
some banks have larger reserves than others. 
Some are habitually more cautious than others. Some have 
larger capital and surplus, in proportion to their liabilities. 
Some have a more steady-going class of depositors, less 
likely to be affected by panic, than others. Such banks 
are able to help their weaker neighbors. By combining or 
" pooling " the reserves of all the banks, the weaker ones, 
or those most exposed to danger, may be saved, and thus the 
panic may be restrained or wholly averted. It is necessary, 
however, that the stronger banks be secured for the advances 
which they make, and the method successfully adopted in 
1893 for aiding the weaker banks, without injuring the 
stronger ones, was the issue of clearing-house certificates. 

1 Page 202. 

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On the 15th of June, 1893, the Clearing-House Associa- 
tion resolved that any member might present to the loan 

committee its bills receivable or other securi- 
Certiflaites ^^^^» together with its own obligation, and 

receive, in exchange for such securities as were 
approved by the committee, "certificates '* for 75 per cent 
of the par value of the same — these certificates to be 
accepted in lieu of cash in the payment of balances at the 
clearing house. The certificates drew interest at 6 per cent, 
payable to the holder, and were in the following form : 


Loan Committee of the New York Clearing-House 

This certifies that the [name of bank] has deposited with 
this committee securities in accordance with the proceed- 
ings of a meeting of the Association held 

Douars^**^**"* J""^ ^5^^' '^93> "P^^^ which this certificate is 
issued. This certificate will be received in 
payment of balances for the sum of Five Thousand Dollars 
from any member of the Clearing-House Association. 

On the surrender of this certificate by the 

depositing bank above named the committee 

will endorse the amount as a paymenton the 

obligations of said bank held by them and 

surrender a proportionate share of the collat- 

eral securities held thereunder. 

$l%^XiO Committee. 

The certificates could not be used for any other purpose ; 
and, as they drew the highest legal rate of interest from the 
time they were used, there was a pressure upon the banks 
not to take out more than they really needed. On the 
proof sheet shown above, the creditor banks were entitled 
to receive $13,073,026.50, which might be paid to them 

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(except fractional sums) in the obligations of the debtor 
banks, secured by these loan certificates. Thus the reserves 
of all the banks were made a common fund. The total 

reserve Was not made any larger by this means, 
PubUc Mind* ^"^ ^^^ ^^^ reserves of all the banks were made 

available for those banks which were in tem- 
porary straits ; and the aggregate demand for currency was 
lessened, because the union of the banks had a powerful 
influence on the public imagination. It did not lessen any 
real want of currency, but it quieted people's fears and 
checked their imaginary wants. 

Suppose that a ** run on the banks " takes place in a 
town which has only two such institutions — Bank A with 

a large cash reserve, and Bank B with a 
s^u*Towii* small one. Bank A, instead of demanding 

payment of the checks on Bank B, which it 
receives in the course of business, may accept the obliga- 
tions of the latter, secured by its assets, and leave it free to 
use all its cash in meeting demands made directly upon it. 
By this arrangement Bank A practically lends Bank B cash 
for paying depositors as long as the reserves of the two hold 
out. If the run should continue, however, both banks, 
although essentially sound, would be forced into liquida- 
tion, unless their creditors should be willing to accept 
certified checks which could not be immediately paid. 
Any creditor whose demand was not paid could force a 

This represents on a narrow scale what takes place on a 
wide scale in a city with a large clearing-house association 

1 In the panic of 1893 there were three banks m the town of 
Albany, Ga., which weathered the storm by means of clearing-house 
loan certificates. In Vicksburg, Miss., five banks joined together in an 
agreement that they would not pay more than $50 per day in cash to 
any one depositor, and did so with impunity. 

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issuing loan certificates in a panic. The combined reserves 
of sixty-two banks are exhaustible in the same way as those 

of two banks or of one bank, but a large 
T^tofaLarge g^Qup of banks united together inspires 

confidence. People believe that it cannot 
fail, and because they so believe, it does not fail. When 
the combined reserves have been lowered to the danger 
point, the banks, instead of paying cash on checks presented 
to them, may stamp them *J good through the clearing house " ; 
and in nine cases ^ut of ten the holders of the checks will 
accept them. in this form and pay them to their creditors, 
who will deposit them in their own banks. The checks 
thus certified pass through the clearing house, where, 
as we have seen, 95 per cent of them offset each other. 
Every bank is required by law to pay every check on 
demand in legal-tender money. Yet, if the holder of the 
check accepts the stamp, **good through the clearinghouse," 
in lieu of cash, the law is satisfied. If he insists upon pay- 
ment at all hazards, the bank must pay or close its doors, and 
in every such case it will try to pay. It keeps back some 
of its cash for such emergencies and to meet the needs of 
manufacturers for the payment of wages, or to answer 
demands where special hardship would arise from the want 
of currency. At such times the influence of public opinion 
is all-powerful and does not allow men to exercise their full 
rights. The fact is recognized that the banks cannot pay 
all their deposits at once and that, when a crisis comes, 
the banks can best judge what- discrimination should be 

The whole amount of loan certificates issued by the New 
York clearing house in 1893 was $41,495,000, of which 
$38,280,000 were outstanding at one time. This did not 
prevent the partial suspension of cash payments. There 
came a time when most of the banks made some difficulty 

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about the payment of checks over the counter, although the 
clearing-house operations continued without interruption. 

Then the phenomenon of a "premium on 
fiway"nted.«^"^'-e"cy" *as .witnessed in Wall Street. 

Certain persons who had currency in their 
possession were glad to sell it at a profit, while others who 
needed it, but who preferred not to add to the troubles of 
the banks by demanding it from them, were willing to give 
more than equal amounts in the form of certified checks for 
it. In this way a brisk business sprang up and the pre- 
mium of currency over certified bank checks rose as high 
as 4 per cent. 

The panic culminated about the last of August. Mer- 
chants and others who were indebted to the banks began 

then to pay their obligations, and the banks 
System^* ***^ began to redeem their loan certificates and 

take up the securities pledged for them. The 
premium on currency gradually subsided. The last loan 
certificates were redeemed and canceled on the first of 
November. Thus, although the issue of loan certificates 
did not prevent suspension altogether, it did avert the worst 
consequences of suspension. It prevented the actual clos- 
ing of any bank in New York City. It kept the trade of the 
country in motion. It enabled employers of labor to keep 
at work and prevented multitudes of business men from 
falling into bankruptcy. In 1893 clearing-house loan cer- 
tificates were issued also in Boston, Philadelphia, Baltimore, 
Pittsburg, Buffalo, Detroit, New Orleans, and many smaller 

On four previous occasions (i860, 1873, 1884, and 1890) 
clearing-house loan certificates had been issued in New 
York in order to curb panics, and with beneficial results in 
each case. The last general bank suspension arising from 
commercial causes only, took place in 1857. Although the 

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clearing house existed then, the system of combining the 
reserves had not been devised. It is probably safe to 
assume that there will never be, in time of peace, another 
general bank suspension. 

In the panic of 1893 various devices were resorted to in 
the smaller cities, in order to procure substitutes for cur- 
rency, for the payment of wages, and for retail 
foTRetoifTradr* trade. In many manufacturing towns of New 
England checks were drawn on banks in de- 
nominations from $1.00 up to $20 and stamped "payable to 
the bearer through the clearing house only." These were 
usually not certified by the banks, the credit of the drawers 
being sufficient to make them pass current in their respec- 
tive communities. In some cases railroad companies issued 
to their employees pay-checks drawn on their own treasurers, 
which were generally accepted along the line of the roads. 
In some Southern towns clearing-house loan certificates were 
issued for general circulation for $1.00 and upward, guaran- 
teed by all the banks in the place where they were issued, 
and secured by their bills receivable, deposited with a cus- 
todian, for 50 per cent more than the amount of the total issue. 
At Mount Vernon, in the state of Washington, the Red Cedar 
Shingle -Company sold shingles by the car load and received 
due bills from the purchasers in small denominations, which 
the company endorsed and paid to its employees. These 
passed current in the community till they were redeemed. 
In Birmingham, Ala., clearing-house loan certificates were 
issued for sums as small as 25 cents. All of these temporary 
devices of circulating medium were withdrawn from use and 
redeemed as soon as the panic subsided.^ 

1 A description of the various substitutes for money which the panic 
of 1893 called into existence, with fac-similes of many of them, is given 
in a. speech of Hon. John DeWitt Warner in the House of Representa- 
tives, June 2, 1894. See also Sound Currencyy Vol. II, No. 6. 

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Clearing is the settlement of mutual claims by the pay- 
ment of differences. In bank clearings the clearing house 
is the only creditor and the only debtor of each bank. It 
ascertains the amount of each bank^s balance, receives the 
money due from the debtor banks, and distributes it to 
the creditor banks. The clearing house is a labor-saving 
machine ; and it makes little difference, as regards the time 
and labor involved, whether the number of banks and the 
amount of claims adjusted be large or small. 

Clearing is susceptible of application to other kinds of 
business than that of banks. There is a railway clearing 
house in London, for the settlement of balances of railway 
earnings. There is a stock exchange clearing house in 
London, and one in New York, for settling differences 
between stock brokers. There was a gold exchange bank 
in New York during the suspension of specie payments, 
which operated as a clearing house for dealers in that 
I "^ A^ clearing-house association, as an organization of banks, 
is well fitted for other tasks besides settling balances with 
each other, fit has been especially useful in calming the 
public mind m times of financial panic^ This it has accom- 
plished by combining the cash reserves of all the banks, 
putting them under the control of a committee, and issuing 
loan certificates for the payment of balances at the clearing 
house. By this means the banks lend to each other their 
cash reserves, according to the discretion of the committee. 
The repayment of the loans is secured by the bills receiv- 
able, or other assets, of the borrowing banks. The union 
of the banks in this manner has a quieting effect upon the 

1 See page 1 50. 

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business community. The holders of checks are thus per- 
suaded in most cases to accept certification of the same, 
instead of demanding payment in cash, and the certified 
checks for the most part balance each other at the clearing 
house. Sinc^ 1857 there have been five financial panics 
which have been greatly mitigated by the use of clearing- 
house loan certificates, and there has been no general bank 
suspension since that year. J 


Cannon's The Clearing House. 
Bolles' Practical Banking. 
Gibbons' Banks of New York. 
Gilbart's Principles and Practice of Banking. 
H. D. Lloyd's article on " Clearing and Clearing Houses," in 
Lalor's Cyclopedia of Political Science. 


-X Digitized by VjOOQIC 


A PUBLIC bank in the American colonies, as we have 
seen, was an emission of circulating notes by a provincial 
government, with a promise of redemption of 
MB^Wng^** the same from the proceeds of taxation at a 
fixed time. A private bank was an emission 
of notes by private persons, to supply a supposed deficiency 
of the medium of exchange. In some cases there was a 
specific promise of redemption of such notes. In others 
there was merely an agreement among the subscribers to 
accept them in trade. According to the latter plan it was 
not necessary that a bank should have any capital, but 
merely that it should have the means of putting its notes in 
circulation. Consequently the subscribers to the undertak- 
ing did not agree to pay money into the bank, but to take 
out and keep out a quantity of the note issues proportioned 
to their subscriptions, and to accept the same in trade as 
the equivalent of money. As security for the fulfillment of 
this promise, and for the ultimate redemption of the notes 
in money or goods, they gave mortgages of land to the asso- 
ciation of which they were members. The association was 
both a lending and a trading company. It bought goods 
with its notes, or loaned the notes at interest on the security 
of land or personal property. 

The current ideas of banking were derived from England, 
and more remotely from the continent of Europe. The 
Bank of Amsterdam was established by the city government 


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of that place in 1609, for the purpose of maintaining the 
true standard of value in commercial transactions. The 

coins then in circulation were not of uniform 
T^^^^*^^* goodness. Some were worn by long use, 

others were mutilated, many were produced 
by private mints. They were of almost countless variety 
and were, on the average, about 9 per cent below their 
nominal value. The Bank of Amsterdam served both as 
an assay office and as a place of deposit. All sorts of coins 
were received from depositors and their weight and fineness 
determined, and the depositors were allowed to draw out 
for their own use, or to transfer to others, the true value in 
standard money, or in " bank money," as it was tommonly 
called. All bills of exchange payable in Amsterdam were 
required by law to be paid in bank money. Transfers of 
such money were at first made by the payer to the payee 
personally in the bank, but this method was afterward super- 
seded by orders in writing ; and here, perhaps, we find the 
origin of the bank check. 

The lesson which had been learned in England from the con- 
tinental banks in the first half of the seventeenth century was that 
if the degraded coin then in circulation should be deposited in a 
bank and an equivalent credit in terms of standard coin be given 
depositors, such credits could be made use of in the adjustment 
of debts by transfers of account at the bank. The idea of mak- 
ing a bank thus act as a clearing house for the nation, through 
the deposit in its vaults of all the current coin, and its conversion 
into bank credits, soon led to propositions to comprehend goods 
and merchandise with coin in the establishment of bank credits. 
This was naturally followed by the argument that land, being 
stable and unperishable, was ^ven better for the purpose than 
coin or goods.^ 

1 Currency and Banking in the Province of Massachusetts Bay^ by 
Andrew McFarland Davis, Part II, "Banking" (1901). 

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The assumption that giving security for the ultimate pay- 
ment of a paper currency is the same thing as providing for 
its redemption at any time, or that it will answer the same 

purpose, is a pernicious fallacy. It confounds 
The Fallacy of • . . . ^ ; , . , , 

Land Banking. ^^^ promise to pay money with money itself. 

The promise to pay is of full face value only 
where there is certainty of its fulfillment at the demand of 
the holder. Security, on the other hand, implies payment 
at some future indefinite time; and, where land is the 
security, the time is usually remote. A paper currency 
must be promptly redeemable in coin. No kind of security, 
not ev^n that of government bonds, is a good substitute for 
such redemption. Yet the idea of "basing" currency on 
various kinds of property, and especially on land, has had 
many advocates; and many experiments — invariably end- 
ing in disaster — have been made with currency of this kind. 
This idea had a strong hold upon the New England 
colonies in the eighteenth century. The first attempt at pri- 
vate banking in Massachusetts of which we 
tion"ofi7i4 ^^^^ ^"^ clear account was made in 17 14. 
* It was entitled "A Projection for erecting a 
Bank of Credit in Boston, New England, founded on Land 
Security." The preamble recited that there was a sensible 
decay of trade for want of a medium of exchange. To 
supply this deficiency certain parties proposed to subscribe 
;^3oo,ooo, every subscriber agreeing to "settle and make 
over real estate to the value of his respective subscription, 
to the trustees of the partnership or bank, to be and remain 
as a fund or security for such bills as shall be emitted there- 
from." Each subscriber was pledged to give the same 
credit to the bills as to those of the province, and to accept 
them in all payments, " upon forfeiture of ;^5o for each 
refusal until the refuser has forfeited his whole security and 
profits." Loans of the bills might be made on "ratable 

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estates," to the amount of two-thirds of their value; on 
" iron or other unperishable commodities, as a pledge, for 
one-half or two-thirds according to the market." Each sub- 
scriber was obligated to take out, and keep out for two 
years, notes of the bank equal, to at least one-fourth part of 
the amount of his subscription ; but he could transfer this 
obligation, or privilege, to any other person on the books 
of the bank. All loans were to bear 5 per cent interest. 
The form of the notes contained no promise 
ti^nl^'''''^^' to P^y» b"t merely the pledge of the sub- 
scribers to " accept the same in lieu of 

shillings in all payments " and the pledge of the bank to 
accept them " for the redemption of any pawn or mortgage 
in the said bank." 

The scheme, although not favored by the General Court, 
was very popular. "The controversy," says the historian 
Attorae -General Hutchinson, "had an universal spread and 
Dudley attacks divided towns, parishes and particular fami- 
the scheme. j-^^ „ p^^j Dudley, the Attorney-General, 

and son of Governor Dudley, made a vigorous attack oh this 
"projection" in a pamphlet printed anonymously. Among 
other things, he pointed out that the pretended security for 
the bills was no security, since the holder of them could do 
nothing with a mortgage if it were turned over to him. 
Besides this, he gave his opinion as a lawyer that the 
" courts would never adjudge those mortgages to be good 
in the law, being for no valuable consideration." Dudley's 
pamphlet was answered by the projectors in another pam- 
phlet, to which they signed their names. Replying to his 
objection as to the mortgage security, they affirmed that the 
mortgages themselves would recite a good and valid con- 
sideration for the giving of them ; besides which, " the sub- 
scribers are each and all obligated to receive the notes in 
all payments." No process was indicated by which any 

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holder could compel any subscriber to receive thfe notes as 
the equivalent of silver money in goods, nor was there any 
provision for fixing the price of the goods. The General 
Court disapproved of the .scheme and, in order to create a 
division in the ranks of its supporters, passed a new loan 
act for ;£'5 0,000 of colonial bills of credit. "This," says 
Hutchinson, "lessened the number of the party for the 
private bank but it increased the zeal and raised a strong 
resentment in those which remained." 

Following this attempt, and evidently patterned on it, was 
a company formed in Connecticut in 1732 under the name 

of the New London Society United for Trade 
B^nk^iJ^"^"" and Commerce. A petition for a charter, 

addressed to the colonial assembly in 1729 
by Solomon Coit in behalf of the company, asked among 
other things that the company be allowed to " ejnit bills for 
currency upon our own credit as we may see occasion at 
any time, for promoting or maintaijiing our trade " and that 
the penalties for counterfeiting the bills should be the same 
as for counterfeiting those of the province.^ The petition 
was refused, for the reason, evidently, that the assembly 
was not willing to grant to a private company the power to 
issue bills of credit as currency. Three years later a char- 
ter was granted to the New London company without the 
power to issue bills, but the company immediately passed 
a vote to issue ;£'3 0,000 of bills and began to put them in 
circulation by buying goods from persons who were willing to 
take them. The bills recited on their face that they should 
be " equal in value to silver at sixteen shillings per ounce, 
or to bills of publick credit of this or the neighboring 
governments." There was no promise that money or any- 
thing should be paid for them, but merely that they should 
be accepted by the treasurer of the society "and in all 

1 Davis, Bankings p. 105. 

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payments in said society from time to time." The society 
had no capital, but the members had executed mortgages of 
land which were supposed to secure the holders of the notes. 
The bills of the New London company were eagerly 
accepted in trade; but, as soon as the fact of their issue 
» came to the knowledge of Governor Talcott, 

luppre^Si"^ he took steps to suppress them. The colonial 

assembly was called together to consider the 
subject. It declared that it was not legal for private per- 
sons to emit bills of credit to circulate as money without 
authority from the government, and it repealed the charter 
of the New London company for violation of its provisions 
— particularly because it had no capital paid in, as the 
charter contemplated, but only mortgages as a basis of its 
trading operations. The company was accordingly dissolved, 
and the legislature made an issue of colonial bills of credit 
with which to redeem the company's bills, taking the mort- 
gages in the hands of the company's treasurer to reimburse 
the government. 

Rhode Island in 1731 struck terror into the business 
communities of Massachusetts and Connecticut by a " new 

bank," with an issue of ;^i 00,000 in bills of 
issnesin?*^! credit as loans to individuals. An attempt 

was made in Massachusetts to forestall this 
issue by an agreement of the leading citizens not to accept 
them in trade. In order, at the same time, to preoccupy 
the field of circulation, a number of Boston merchants of 
high standing formed a partnership and issued ;^i 10,000 
of notes intended for general circulation. They were issued 
as loans at interest, repayable in notes of the same kind, 
or in coined silver of specified weight and fineness, at 
different periods during the next ten years. The details of 
the issue are interesting, but the only fact ctf importance 
now is that this was an attempt to drive out a bad currency 

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by issuing a better one to take its place. The result was 
in strict accord with Gresham's Law. The Rhode Island 
bills came in, despite the efforts made to keep them out. 
They caused a further depreciation of the currency. The 
merchants' notes, which had a fixed value in silver and were 
supported by the credit of wealthy and well-known citizens, 
commanded a premium and were consequently hoarded. 

This kind of banking found imitators in the Province 
of New Hampshire. In 1735 a number of merchants in 
\ Portsmouth formed a partnership and issued 
ExperimMit^* ^® notes of various denominations, payable in 
ten years " in silver or gold at the then cur- 
^rent price." The only important fact about this bank is 
\hat the assembly of Massachusetts passed an act to pro- 
hibit the circulation of these notes in the latter province, 
and that the Lords of Trade in London disallowed it, on 
the ground that, since nobody was obliged to take them, " it 
would be a great hardship to set a public mark of discredit 
upon the persons engaged in this undertaking." In other 
words, the Lords of Trade recognized the fact that the issue 
of notes by private persons to circulate as money was per- 
missible, provided they were not made legal tender. 

The next attempt to establish a bank in Massachusetts, 
and the one most disastrous to the projectors, was made in 
1740 under the name of the "Land Bank or 
of'mo*^^ ^*°^ Manufactory Scheme." ^ It was an outgrowth 
of the ideas which gave birth to the " projec- 
tion" of 17 14 and to the New London Bank of 1732. The 
prospectus was published as a broadside on the loth of 

1 " See i letter to a merchant in London concerning a late combina- 
tion in tnfe -Province of Massachusetts Bay in New England to Impose 
or Force aVjPrivate Currency called Land Bank Money; printed for the 
publick Good^T74i." This pamphlet is anonymous, but Mr. A. Mc Far- 
land Davis Sjijrs that it was written by Dr. William Douglass. The style 
certainly resembles that of Douglass. 

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March, 1739-40. It proposed to found a bank with a capi- 
tal stock of ";^i5o,ooo lawful money" but did not provide 
for paying in any money, except 4s. on each ;^iooo, to 
meet the expenses of organization. Each subscriber was 
to " make over an estate in lands " to the satisfaction of the 
directors and pay 3 per cent interest for the same, either in 
the bills of the company or in various manufactured articles, 
the produce of the provinces. The list of things so receiv- 
able included hemp, flax, cordage, iron, wool, beeswax, 
tallow, cord wood, and a dozen others, at prices to be fixed 
by the directors. Five per cent of the principal of the 
subscription was to be paid each year in the same articles 
or in said bills. The form of the bills was appended to 
the prospectus, thus : 

Twenty Shillings. 

We promise for ourselves and partners to receive this twenty 
shilling bill of credit as so much lawful money in all payments, 
trade and business, and after ye expiration of twenty years to pay 
ye possessors ye value thereof in ye manufactures of this province. 

The wording of the bills was subsequently changed to the 
following form ': 

We jointly and severally promise, for ourselves and partners, 
to take this bill as lawful money at six shillings eight pence per 
ounce in all payments, trade and business and for stock in our 
treasury at any time ; and after twenty years to pay the same at 
that estimate on demand of Mr. Joseph Marion, or order, in the 
produce or manufactures enumerated in our scheme, for value 

Although no method of issuing notes was described in 
the prospectus, it was understood that the capital stock of 
;f 150,000 was to consist of bits of paper of the foregoing 
tenor, to be divided among the subscribers in proportion to 
their subscriptions, and that they were to buy goods with 

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them, subject to the condition that they should accept 

them in trade, at the rate of 6s. 8//. per ounce of silver — 

a phrase which, in the absence of any fixed 
Its Wote Issae. ; • "^ 

prices for the goods traded in, was quite 

meaningless. But even if this had been a solvent specie- 
paying bank, the net result would have been a donation 
of the face value of the notes by the public to the bankers, 
without any return whatever, since the notes were payable 
only at the end of twenty years, and the prevailing rate 
of interest was 5 per cent. At least one thousand men 
of Massachusetts saw this prospect of gain, for fully that 
number subscribed for shares in the " Land Bank or Manu- 
factory Scheme." These men had large political influence. 

They soon acquired a majority in the House 
Sor'elher. <^f Representatives, but Governor Belcher 

and the Council were bitterly opposed to the 
project. The governor issued a proclamation against it 
and cautioned all persons, especially all office holders, against 
receiving the bills of the Land Bank, saying that they tended 
to defraud people of their property. 

Notwithstanding this opposition, the Land Bank began 
to issue its bills in September, 1740. Their appearance 

in business circles caused much anxiety in 

fr^i*i™f '*°" Boston, whose merchants could not tail to see 
sequences. ' 

the mischievous and unsubstantial nature of 
the scheme. One hundred and fifty of them signed an agree- 
ment that they would not take the Land Bank bills on any 
terms or countenance their use in any way. The Land Bank 
now became the great issue of the day, overshadowing every 
other. Governor Belcher removed from office several persons 
who favored the bank after he had issued his proclamation 
against it. Many others tendered their resignations, among 
them Samuel Adams, Sr. The directors of the Land Bank 
sent a copy of their articles of association to the Council for 

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record. The Council ordered the secretary not to receive it 

and voted that the presentation of it was an indignity. 

That the Land Bank was legal, in the absence of any 

prohibition by the General Court, does not admit of doubt. 

Governor Belcher, the Council, and the Boston 

Parliament merchants knew this. They knew also that 

takes Action. ^ 

they could not get the lower house -to join 

with the Council in prohibiting it. So they turned to 
Parliament, and here they were more successful. On the 
27th of March, 1741, the House of Commons passed an 
act extending the provisions of the so-called Bubble Act of 
1720 to the American colonies. The latter act had been 
passed in order to prohibit the transaction of business by 
joint stock companies without special authority of statute, 
and it imposed severe penalties upon those who should do 
so. It was applicable only to the United Kingdom; yet 
Parliament now declared that it "did, does and shall extend 
to America," and in the preamble it referred expressly to 
the Land Bank as one of .the offenders against it. This 
was ex post facto legislation, based upon historical untruth. 
Not only had the Lords of Trade, in the New Hampshire 
case cited above, refused to put the stamp of illegality upon 
a bank in the colonies, but the Attorney-General in 1735 had 
declared in an official communication that there was no 
objection in point of law to a land bank at that time pro- 
jected " at Boston in the Massachusetts Bay." 

Before the news of the act of Parliament reached Boston 
the bills of the Land Bank had been somewhat discredited 
by reason of the refusal of the principal merchants of 
„ ^ , Boston to touch them. Their action caused 

Mob Violence. 

.great exasperation in the rural districts, and a 

movement was started to use mob violence against them. 

Governor Belcher received information of the intended riot 

and sent the sheriff to arrest the leaders of it. 

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The Land Bank men, in order to get their notes in circu- 
lation, had bought any kind of goods for which the owners 
would accept the notes in payment, and at such prices as 
the individual traders could agree upon. There was noth- 
ing like a uniform price of goods so bought. Now the 
Bubble Act altered the terms of these private contracts by 
giving the holders of the notes an immediate right of action 
against every partner for their face value. Many of the 
shareholders were ruined. Some of them lyithdrew to the 
neighboring colonies where they could not be reached, leav- 
ing a heavier burden upon others. The affairs of the Land 
Bank occupied the attention of the General Court for a 
quarter of a century, and the litigation growing out of its 
affairs was protracted till 1767 or later.^ 

No step taken by the mother country in reference to the 
colonies was more maladroit than this. No other, not even 
the Stamp Act, caused greater bitterness. It was also quite 
unnecessary, for the Land Bank was doomed to an early 
death by its inherent vices. Its weakness had already been 
manifested in the early return of its bills to the company's 
treasurer and to individual members, to be exchanged for 
tangible property, lest they should fall in value. Just as it 
was beginning to totter by reason of its own feebleness the 
British government gave it an annihilating blow. All the 
educating and helpful influence that would have followed 
from a natural demise was lost, and in its place was planted 
an undying animosity toward the mother country for an act 
of glaring injustice. 'Massachusetts was nearly ripe' for 
revolution in 1741. 

1 The history of the Land Bank of 1740, down to the smallest minu- 
tiae, is given by Mr. A. McFarland Davis in the volume previously 

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The principles of banking are the outgrowth of experi- 
ment. They must be learned from the history of banking, 
and particularly from the laws that have been enacted from 
time to time. These laws are the crystallization of ideas 
dominant at given periods. 

The earliest ideas of banking in the American colonies 
were drawn from the mother country, and, more remotely, 
from the continent of Europe. The commonest conception 
of a private bank in New England was that of a company 
or partnership formed to supply circulating notes as a 
medium of exchange, in addition to the bills of credit of the 
colonial governments. It was believed that, if such notes 
were bottomed on landed security, current redemption would 
not be necessary. In this view no capital was required for 
the starting of a bank, but merely confidence. Several 
attempts were made to establish banks and to supply* a 
medium of exchange on this theory, but the experiments 
were always checked or suppressed by the colonial or the 
home government before the ultimate economic results had 
manifested themselves. 


Dr. Wm. Douglass' Discourse concerning the Currencies of 
the British Colonies in America. 

Hutchinson's -^/j/^rj/ of Massachusetts from 1628 to 1774. 

Felt's Historical Account of Massachusetts Currency. 

Trumbull's The First Essays at Banking and the First Paper 
Money in New England. 

C. H. J. Douglas' Financial History of Massachusetts. 

Davis' History of Currency and Banking in the Province of 
Massachusetts Bay : Vol. II, "Banking." 

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The first bank in the United States was the Bank of 
North America, at Philadelphia. It was planned and put 

in operation in 1781 by Robert Morris, the 
A^eri^,^'''^*' Superintendent of Finance of the Revolution, 

in order to give financial support to Washing- 
ton's army. It had been preceded by a so-called " Bank of 
Pennsylvania," which was a private subscription of money, 
not for the sake of profit, but to supply rations for the army 
when the Continental currency was becoming worthless. 

.Morris conceived that a bank with a paid-up capital, on a 
specie basis, and in high credit, "would have the interest 

of a stock two or three times larger than that 

cS^Sn^78i. ^^^^^ '^ ^^^^^y possessed." By this he meant 
that it could lend its credit, and receive inter- 
est therefor, to an amount tw^ or three times larger than 
its cash on hand, — a sound conception. The project was 
approved by Congress, which granted a charter to the bank 
on May 26, 1781. The great difficulty was to secure the 
necessary subscription. The capital stock was fixed at 
J5 1 60, 000, with power to increase it, but only $70,000 was 
subscribed in the -first four months. Fortunately a French 
frigate arrived at Boston in September, bringing $462,862 in 
specie to the government. Morris brought it in wagons to 
Philadelphia and lodged it in the bank. He then increased 
the capital stock to $400,000 and made a subscription of 
$250,000 thereto for the government, paying in $200,000 of 


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the amount. This brought financial support to the bank 
from private s^purces and gave it immediate credit, through 
which it was enabled to make large advances to 
Rimiution"**^* the government, besides doing a considerable 
business in the discount of commercial paper. 
Morris' anticipations were fully realized. The troops were 
regularly fed, clothed, and paid ; industry revived ; the bank's 
notes were redeemed in specie on demand ; and it was found 
that there was no lack of a circulating medium. This magi- 
cal transformation took place after the Continental currency 
had disappeared, and largely because of its disappearance. 

Doubts existed whether Congress had the power, under 
the Articles of Confederation, to charter a bank. Conse- 
quently, the Bank of North America sought 
Pennsyivamia^ and obtained another one from the legislature 
of Pennsylvania. After the termination of the 
war the bank became very prosperous, paying dividends 
of 14 per cent per annum. These gains prompted the 
starting of another bank in Philadelphia ; but the Bank of 
North America offered to enlarge its capital and take in the 
subscribers to the new bank, and the offer was accepted. 

Morris had remarked in 1784 that the bank had created 

a habit of punctuality in the payment of debts and that 

everybody felt the benefit of it, — meaning 

Attacks on the everybody who was in good credit. These, 
Bank after the , ^ ^ r r , • . . ' 

ij^ar. however, were far from bemg a majority of 

the people. Complaints were made to the 
legislature that the bank was guilty of favoritism, extortion 
and harshness to debtors, and that it tended to destroy that 
equality which ought to exist in a commercial country. A 
petition embodying these and' other accusations was pre- 
sented from citizens of Chester County, with a hint that 
bills of credit issued by the state would be more beneficial 
than bank notes. This meant that bills of credit would be 

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distributed according to population or political influence, 
whereas bank loans were at the service only of men who 
could repay them at maturity. 

The legislature took the matter into consideration and 
appointed a committee ** to inquire whether the bank estab- 
lished at Philadelphia was compatible with the public safety 
and that equality which ought ever to prevail between the 
individuals of a republic." This idea, that the business of 
banking savors of aristocracy and tends to the overthrow 
of free institutions, had a strong hold on the public mind 
in the early years of the republic ^ and has not yet wholly 
disappeared, although it has undergone some modifications. 
The legislature of Pennsylvania was so far 
rer^aied^^'^ convinced of the tendency of banks to pro- 

duce inequality among citizens that it repealed 
the charter of the Bank of North America on September 3, 
1785, within three years of the time when it had rendered ines- 
timable services to the patriot cause. The bank protested 
that the charter was irrepealable and continued its business, 
but took steps to obtain a charter from Delaware, with the 
intention of transferring itself to Wilmington. Such a charter 
was granted early in 1786. Then Pennsylvania, fearing lest 
it should lose the bank, in 1787 granted it a new charter 
which was renewed from time to time and under which it 
continued till the national banking law was passed. It 
declined at first to enter the national system, because, under 
the rules adopted by Secretary Chase, it would have been 
obliged to change its name. But a dispensation was granted 
to it, on account of its illustrious origin, to come in without 

1 " Pope, of Kentucky, in the debate of 181 1, said that the Virginians 
were known to be very poor financiers, * for they were, a few years since, 
frightened at the very name of a bank. ... It required all the eloquence 
of [Brent of Virginia] to persuade the Legislature that the little Bank of 
Alexandria would not sweep away their liberties.* " — Sumner, History 
of Banking in the United States^ p. 20. 

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such change. The Bank of North America is now one 
hundred and twenty years old, and it has passed its semi- 
annual dividend only five times. The benefit 
And re^nacted. 

it has conferred upon the country, by setting 

an example of sound principles and practice in banking, is 
second only to its patriotic service in the Revolution ; and 
for both we are indebted to Robert Morris, although he was 
never president or even a director of the bank.^ 

Ordinarily it would not be good banking practice to 
advance large sums of money to the government or to have 
the government for a shareholder of the bank, but both of 
these features were necessities in the case of the Bank of 
North America. Within the limits thus imposed, the bank 
was conducted in a businesslike manner. The government 
paid interest and principal on its loans like a private bor- 
rower, and received dividends on its shares like a private 
stockholder. It ceased borrowing and sold its shares as 
soon as possible. 

Next in point of time was the Bank of Massachusetts. Its 
charter, granted by the legislature on February 7, 1784, con- 
tained no restrictions or conditions except the 
^setts*^***' right of the legislature to examine its affairs. 
No mention was made of circulating notes, 
since the right to issue them was thought to be embraced 
in the right to be a bank, though a subsequent law was 
passed by the same legislature to punish persons who should 
counterfeit the notes. The first restrictions on the bank 
were imposed by a law passed in 1792. These wer^: (i) 
that the bank should not issue notes smaller than J55.00 ; 
(2) that the outstanding notes and loans should not exceed 

1 A History of the Bank of North America down to 1882 has been 
written by Lawrence Lewis, Jr. An interesting account of its origin 
and early years is given in Sumner's Financier and Finances of the 
American Revolution. 

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double the amount of the capital stock actually paid in ; 
(3) in case of violation of this law, the directors were made 

personally liable for the debts of the bank, but 
SXi^otfB those who were absent or had dissented might 

exonerate themselves by giving notice forth- 
with to the governor of the state; (4) statements of the 
bank's affairs were to be given to the governor and council 
every six months, but no form of statement was prescribed ; 
(5) the bank was prohibited from dealing in merchandise or 
in the shares of any bank. 

The third in point of time was the Bank of New York, 
founded — or, at all events, proposed — by Alexander 

Hamilton in 1784, as an alternative to a 
Yort ^*^^^ land bank favored by Chancellor Livingston. 

Under the Livingston plan one-third of the 
• bank's capital was to be paid in cash and the remaining 
two-thirds was to consist of landed security in New York 
and New Jersey. In March, 1784, Hamilton wrote a letter 
to J. B. Church, counseling him against this project and 
proposing a " money bank " in place of it. He dissuaded 
several city merchants from taking an interest in the land 
bank, and they then asked him to draw up articles for a 
money bank, which he did. This was the Bank of New 
York. It began business without a charter on June 9 of 
the same year. As its application to the legislature for a 
charter was refused, it began business without one ; but the 
only penalty for doing so was the condition that the liability 
of the shareholders for the debts of the bank was unlimited. 
The bank, when organized, announced that the rate of 
interest on loans would be 6 per cent, that loans should 
run for thirty days only, that no note would be discounted 
to pay a former one, that payments to the bank must be 
made in its own notes or in specie, and that overdrafts 
would not be allowed. Gold coins, which at that time were 

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more or less clipped or abraded, were to be received by 
weight only. These regulations, especially the one requiring 
punctual payment of debts, made the bank very prosperous 
but very unpopular. 

The directors were charged with working in the interest of 
British capitalists and traders and with refusing discounts a few 
days before the sailing of the European packet, that they, person- 
ally, might profit by the distress thus occasioned. 
Unpopular ^^^ bank, it was contended, had destroyed private 

credit, as well as that confidence, forbearance and 
compassion formerly shown by creditors to their debtors. Such 
was the result of enforcing the payment of a note at maturity 
when lodged in the bank. And among the terrible consequences 
to follow, it was predicted that *' if their number Js^ not restricted, 
should banks be permitted in America, af^ the profits they yield 
are known, we may not alone have one in every state but also in 
every county of the different states." ^ 

In 1786 the state made an emission of bills of credit, 
with the result that the bank divided itself into two parts, a 
specie bank and a paper bank, keeping the accounts of the 
former in dollars and of the latter in pounds, making dis- 
counts in paper on Tuesdays and in specie on Thursdays, 
and issuing some of its circulating notes redeemable in 
paper of the state and others redeemable in specie. 

An application was made for a charter in 1785 and another 

in 1789. Both were refused. A charter was finally granted 

to the bank in 1791. It provided (i) that 

^^tL^i the debts of the bank, "over and above the 

Restrictions. ' 

monies then actually deposited in the bank," 
should not exceed three times the amount of the capital 
actually paid in ; (2) that it should not hold real estate, 
except such as might be requisite for the accommodation of 
its own business or such as it should have taken as security 
1 History of the Bank of New Yorky 1784- 1SS4, by Henry W. Domett. 

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for debts previously contracted; (3) that it should not 
deal, or trade, in any kind of commodities, or in the stocks 
of the United States, or of any state, though it might, when 
necessary, sell any such stocks pledged to it by way of 

In the first list of shareholders of this bank are the names 
of Alexander Hamilton, Aaron Burr, and Rufus King. One 
of the depositors was Talleyrand, some of whose checks are 
still preserved. 

The earliest regulations of banking enacted by public 
authority in the United States were those enumerated 
above. The first regulation of Massachusetts had refer- 
ence to the denominations of bank notes. The question 

whether a bank should be allowed to issue 
snwUNotL notes smaller than $5.00 or $10 was a matter 

of controversy in most of the states during 
the first half of the nineteenth century. Legislation on the 
subject was not uniform. It was contended, on the one 
hand, that it was desirable to have a large amount of specie 
in circulation, in order to give stability to the currency, and 
that the way to secure this was to banish small notes. It 
was also argued, on the other side, that the circulation of 
specie, beyond the amount required for small change, 
was an inconvenience and involved an appreciable loss 
by abrasion. Experience in the United States has now 
decided in favor of paper currency of denominations as 
small as $1.00. 

The restriction of notes and loans to twice the capital 
stock actually paid in was intended to guard against undue 

expansion of both debts and credits. In the 
Restriction later legislation of Massachusetts, as will be 

of Debts and , . . 1 , ^ 

Credits. seen, the restriction was changed so as to 

provide that neither the credits nor the debts 

of a bank (except for deposits) should exceed twice the 

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capital, the deposits not being reckoned as debts for this 
purpose. (This restriction, as regards loans, has been 
superseded in the national banking law by a require- 
ment that a bank shall not make new loans when its 
cash reserve is below a certain percentage of its deposits.) 
In case of violation of the law, the directors were per- 
sonally liable for the debts of the bank unless they took 
immediate steps to make their dissent known to the public 

The reasons for requiring periodical bank statements 
have been considered in Chapter II, but the Massachusetts 
requirement was defective, since it gave opportunity to the 

bank's officers to make special preparations 
bitionf'*^^*" therefor. The prohibition against trading in 

merchandise was proper, since such trading 
would have made the banker a rival in business of the 
merchant and to that extent would have incapacitated him 
for discounting the merchant's paper. The two vocations 
should be cooperative, not competitive. It was inexpedient 
also for a bank to buy its own shares, since by so doing it 
impaired its capital. If Bank A, for example, with a paid 
capital of $100,000, buys in all its shares, it stands just 
where it was before any was paid. If Banks A and B buy 
each other's shares, the result is the same as though each 
one had bought its own shares. The community, in that 
case, has no more banking capital than if neither of them 
had ever existed. 

As the debts of a bank consist, for the most part, of its 
deposits and its circulating notes, the first legal restriction 

on the powers of the Bank of New York was 
RestrSions practically that its note issues should not 

exceed three times the amount of its paid-up 
capital. If there was to be any legal restriction on note 
issues, this provision was sufficiently liberal. At the time 

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when the charter was granted, and while there was no 
restriction whatever on its note issues, its paid-up capital 
was J53 18,250 specie, and its outstanding notes of the two 
kinds only $360,000 specie value. The clause in reference 
to the holding of real estate was a sound restriction. Since 
a bank's liabilities are payable on demand, its investments 
should be in quick assets. Real estate is not included in 
that category. The prohibition against trading in commodi- 
ties is a repetition of the law of Massachusetts, and the 
reasons for it are the same. It does not, however, follow 
that the banker should not buy or sell stocks of the state 
or of the United States. Those are often highly desirable 
forms of investment for some part of the funds of banks, by 
reason of the facility with which they can be turned into 
cash in emergencies. 


When the Federal Constitution was 'formed, there were 
three banks in the United States, which still exist, — the 
Bank of North America at Philadelphia, the Bank of Massa- 
chusetts, and the Bank of New York. All were issuing cir- 
culating notes, and continued to do so, without dispute or 
question, after the Constitution was adopted. It is plain, 
therefore, that the clause of the Constitution which prohibits 
the states from emitting bills of credit did not prohibit, or 
have any reference to, bank notes. 

One of these banks existed several years before it received 
a charter from the legislature, and it exercised, without dis- 
pute or question, the functions of issue and deposit. 1^ is 
evident, therefore, that the banking business was free in the 
iJnited States until it was restrained by-St2lute. "Restric- 
tions were enacted by the state legislatures from time to 
time, which reflect the state of public opinion at the several 

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times and places. The earliest regulations of law related to 
the denominations of bank notes, to the proportions which 
should exist between the capital on the one hand and the 
debts and credits of banks on the other, to the holding of real 
estate, and to the power of trading in goods and securities. 


Sumner's Financier and Finances .of the American Revolution. 
Lewis' History of the Bank of North America. 
Domett's History of the Bank of New York, 1 784-1 884. 

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The next event of importance in the history of banking 
in this country was the organization of the Bank of the 
United States in 1791. This institution was established on 
lines laid down by Alexander Hamilton, the 
Report *^°'^ first Secretary of the Treasury, in a report dated 

December 14, 1790, made in obedience to an 
order of the House of Representatives. This report embraced* 
a statement of the principles which should, in his opinion, 
govern such an institution and of the reasons why it might 
be useful to the government in emergencies and to the busi- 
ness community at all times. Hamilton took ground against 
paper money issued by the government, either directly or 
through a bank owned by itself, but he saw no reason why the 
government should not be a partner in the bank, provided 
the management was in the hands of the private owners. 

-The bank act passed by Congress followed, for the most 
part, the plan which he proposed. The capital was to 
be J5 1 0,000,000, divided into 25,000 shares of $400 each. 
Eight millions of the capital stock was open to subscription 
by the public, one-fourth to be paid in specie and three- 
fourths in government obligations bearing 
capiteT^^'^ 6 per cent interest, the subscriptions to 

be paid within two years. The remaining 
$2,000,000 of the capital might be subscribed by the United 
States, payable in ten equal annual instalments with interest 
at 6 per cent, and was so subscribed. Each shareholder 


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was entitled to cast one vote for one share, one vote for the 
next two shares, and so on, no shareholder being entitled to 
cast more than thirty votes. Foreign shareholders were not 
allowed to vote by proxy, and -tiierefore practically could 
not vote at all. Not more than three-fourths of the directors 
were eligible for the next succeeding year. The bank could 
not hold real estate except for the immediate accommoda- 
tion of its business, but it was not forbidden to lend on 
mortgage security. The bank could not become indebted 

for a greater amount than its capital stock, 
ChSter **^°* ^' *** ^^^^ ^"^ above the amount of its deposits, — 

that is, the deposits were not to be counted 
as liabilities, in estimating its right to contract debts. In 
case of excess, the directors were to be personally liable to 
creditors of the bank, but directors absent or dissenting 
might exonerate themselves by notifying the President of 
the United States and the stockholders at a meeting which 
they should have the power to call for that purpose. There 
was no other limit on the note issues of the bank than this. 
It meant substantially that the circulating notes might be 
equal in amount to the capital stock. The head of the 
Treasury should have the right of inspecting all of the 
affairs of the bank except the accounts of private individ- 
uals and could call for reports as often as once a week if 
he chose to do so. The notes of the bank should be 
receivable for all public dues as long as said notes were 
payable in gold and silver coin. The Treasury was not 
required to deposit the public money in the bank. The 
bank might have branches wheresoever the directors should 
see fit It might sell any part of the public debt of which 
its stock was composed, but could not purchase any public 
debt whatsoever, nor trade in goods except such as might 
have been pledged for money loaned and not repaid. 
The rate of interest on loans could not exceed 6 per gent. 

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The government pledged itself to grant no other charter for 
a bank during the continuance of this one, which was lim- 
ited to twenty years. The bill passed the Senate Decem- 
ber 23, 1790, without a division. It passed the House 
February 8, 1791; yeas 39, nays 20. All the affirmative 
votes, except three, were from states north of the Potomac, 
mostly of Federalists ; all the negative, except one, were from 
states south of it, mostly of anti-Federalists, or Republicans, 
as the followers of Jefferson were called. 

President Washington called for the written opinion of 
the Attorney-General, Edmund Randolph, on the constitu- 
tionality of the bill. It was given adversely 
SBiu."*"*^*^ to the measure. He then asked for that of 
the Secretary of State, Mr. Jefferson. This 
was also adverse. Jefferson held that there was no warrant 
in the Constitution for the incorporation of a bank by Con- 
gress, and that it could not be considered " necessary " for 
carrying into effect any other power expressly conferred 
upon Congress. He admitted, however, that if, in the Presi- 
dent's mind, the pros and the cons were pretty evenly bal- 
anced, the doubt ought to be resolved in favor of the bill, as 
a matter of respect and deference to the legislative branch 
of the government. The opinions of Randolph and Jeffer- 
son were then sent to Hamilton for such answer as he might 
be able to make, and he replied at considerable length and 
with great force. He held that the word " necessary," as 
used in the Constitution, did not mean absolutely necessary, 
but fitting and appropriate. He said that no power had been 
conferred upon Congress to establish lighthouses and buoys. 
The power to erect and establish these things was inferred 
from the power to regulate commerce and nobody questioned 
it, yet commerce could be regulated without lighthouses and 
buoys. Hamilton's arguments prevailed, and Washington 
signed the bill. 

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Of regulations in the charter of this bank additional to, 

or different from, those of the earlier ones, mentioned in 

the preceding chapter, the most important 

RrTtions ^^^ ^^^^® relating to the composition of the 

bank's capital and to participation of the 

government's a shareholdeir In explanation and defense 

"oTthe provision which allowed three-fourths of the capital to 

be paid in the 6 per cent obligations of the government, 

Hamilton said in his report : 

The chief object of this is to enable the creation of a capital 
sufficiently large to be the basis of an extensive circulation and 
an adequate security for it. . . . To collect such a sum in this 
country in gold and silver into one depository may, without hesi- 
tation, be pronounced impracticable. Hence the necessity of an 
auxiliary, which the public debt at once presents. This part of 
the fund will be always ready to come in aid of the specie ; it will 
more and more command a ready sale and can therefore be expe- 
ditiously turned into coin if an exigency of the bank should at 
any time require it. 

No exception need be taken to this argument, considering 
the time and circumstances of the case. Ordinarily it would 

not be considered good banking practice to 
Ji'I^ISder. ^c^^P^ anything but money as a part of the 

capital, even though some portion of it were 
subsequently invested in government bonds. Such invest- 
ment should be left to the discretion of the directors after 
the organization is effected. Although, as Hamilton said, 
the bonds were intended to be the basis of circulation and 
an adequate security for it, they remained under the control 
of the bank and might be converted into money at any time. 
The government's participation as a shareholder was not 
justified in this instance by necessity, as it had been, ten 
years earlier, in the case of the Bank of North America. 
Private persons were now eager to supply all the capital 

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required. If pecuniary gain were a sufficient reason for the 
government's participation, it could have been obtained 
more easily, and without risk, by a tax. Even if we conceive 
it expedient for the government to have been a shareholder 
at all, the clause which allowed it a long credit in paying for 
its stock was indefensible. It was a speculation on the part 
of the government, and a successful one as it turned out, 
but it set the example of paying for shares with "stock 
notes," which was the poison of banking in the United 
States for the next fifty years. 

The provisions giving to the small shareholders greater 
voting power in proportion to their holdings than the large 
ones and requiring one-fourth of the directors to retire at the 
end of each year were intended to prevent the bank from 
passing into the control of a clique. These methods of dis- 
tributing power in the management of banks 
SharehoWerr ^^ ^^^^ ^^^^ generally adopted by the state legis- 
latures in the first half of the nineteenth cen- 
tury, but their importance was evidently overestimated, since 
they have been wholly abandoned without any harmful con- 
sequences. The provision which prohibited the foreign 
shareholders from voting by proxy was intended to exclude 
foreign influence from the management. As the owners 
abroad would not be likely to cross the ocean in order to 
vote, they would not be able to vote at all. Foreign influ- 
ence was very much of a bugbear at that time, but it does 
not appear that the shareholders in Europe ever betrayed 
any desire to vote or to exercise any influence whatever on 
the management. 

The provision that the note issues of the bank should 
not exceed the amount of the capital stock seems to have 
been unnecessary, since no report of note issues exceeding 
$5,157,378, or a little more than one-half of the capital, has 
reached us. Very few reports of the condition of the bank, 

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however, were published. It is not known whether the 
Secretary of the Treasury ever exercised his right of inspect- 
ing, or how often he called for reports of its 
other Provisions. ,. . ^ , , 

condition. Only two such reports were sub- 
mitted to Congress by Gallatin, both- being in connection 
with the proposal to renew the charter. 

The Treasury was not required to keep the public money 
in the bank, but it kept about two-thirds of it there, and the 
balance in state banks selected by the President. The parent 
bank was at Philadelphia. It had branches at Boston, New 
York, Baltimore, Norfolk, Charleston, Savannah, Washington, 
and New Orleans. It transferred the public funds from 
place to place at its own expense and paid the mpney on the 
order of the Treasurer of the United States wherever wanted. 
The prohibition against the purchase of any public debt 
was adopted because it was believed that the bank would 
be ablej with its large capital, to control the market and 
put the price of government securities up or down at its 
own pleasure. 

The entire capital of the bank was subscribed for within 
two hours after the books were opened. It was a great 
financial success from the start. It began operations in 
December, 1791, and paid a dividend of 4 per cent in July, 
1792. In 1809 Mr. Gallatin reported that the 
Succes?^'**^^ government had made a profit of $671,860 on 
the sale of its shares besides receiving divi- 
dends at the average rate of 8| per cent per annum. Of 
the 25,000 shares, 18,000 were held abroad and 7000 in 
the United States. The outstanding circulation at that 
time was $4,500,000; specie on hand, $5,000,000 ; deposits, 
$8,500,000; loans arid discounts, $15,000,000, consisting 
mostly of sixty-day paper. 

The government, at that time, did not require the pay- 
ment of customs duties on the delivery of the goods imported, 

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but accepted thj bonds of the importers payable at a future 
date. The bank collected the payment of the bonds, and it 

refused to refceive th'e notes of non-specie-pay- 
fhf cu^r^ncy!' ^^S banks. It thus established a standard of 

commercial honor and enforced it upon the 
banks chartered by state authority. In this way it became 
a regulator of the currency, but it incurred the enmity of 
the slovenly and fraudulent bankers of the period and of the 
second-rate traders and speculators by the rigidity of its 

In 1809 Secretary Gallatin recommended a renewal of the 
bank's charter with an increase of its capital to $30,000,000. 
War with England was impending, and Mr. Gallatin proposed 
that the bank should be bound in the new charter to lend 
three-fifths of its capital to the government if required to do 
so, and that it should pay interest on all government deposits 
in excess of $3,000,000. A contest of extreme bitterness 
ensued. The bank had been established in the first instance 

by the Federalists, who had lost political 

chartrUUed. P^^^'" ^^^^"g ^^^ P^st eight years, but were 
still strong in wealth and respectability. They 
had established the bank against Mr. Jefferson's ideas ; and 
he, although yielding to Mr. Gallatin on practical measures 
and signing various bills supplementary to the original 
charter, had remained, both in his administration and in 
his retirement, a consistent foe to it. President Madison, 
who, as a member of the House, had opposed the original 
charter on the ground of unconstitutionality, was now dis- 
posed to look at the question as res adjudicata. He neither 
favored nor opposed a new charter. There was, however, 
a faction opposed to Mr. Gallatin which had its principal 
seat in Pennsylvania, its leaders being William Duane 
and Michael Leib. These men wanted to have certain 
changes made in the Federal offices in Philadelphia, which 

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Mr. Gallatin refused on public grounds. The spoilsmen 
were determined to force Gallatin out of office if they could, 

and to this end they opposed everything that 
System *^^ he favored. A clique in Maryland headed by 

the Secretary of State, Robert Smith, and his 
brother. Senator Smith, was equally bitter again«t Gallatin 
and consequently against the bank. 

Notwithstanding this factional opposition the usefulness 
of the bank was so manifest that there would have been a 
strong majority for the new charter, if the question had come 
to a vote when the subject was first taken up. On the 
2d of April, 18 10, the House Committee, to whom the peti- 
tion of the bank for a recharter had been referred, reported 
favorably. On the 2 ist of the same month a motion to post- 
pone indefinitely was defeated; yeas 46, nays 67. Then the 
matter was laid over informally till January 4, 181 1. The 
state banks took advantage of the delay to bring pressure 
on their local representatives against a recharter. They 
wanted to secure the goviernment's deposits for themselves 
and to get rid of the competition of the great bank in other 

ways. Some persons who had more political 
^wcharter.*^^ influence than credit were incensed because 

their paper had been refused for discount at 
the bank. The Republicans seized this opportunity to be 
revenged on the Federalists. They denounced the bank as 
an aristocratic, and especially as a foreign, institution. One 
of the most vehement speakers against the bank, on account 
of the foreign holdings of its shares, was Henry Clay, who 
said in a speech in the Senate on February 15, 1811 : 

Seven-tenths of its capital is in the hands of foreigners, and 
these foreigners chiefly English subjects. 'We are possibly on the 
eve of a rupture with that nation. Should such an event occur, 
do you apprehend that the English premier would experience any 
difficulty in obtaining the entire control of this institution ? 

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Mr. Gallatin had exposed this fallacy two years earlier by 
showing that the foreign shareholders had no vote in the 
management and that, if the charter were not renewed, the 
portion of the bank's capital held by foreign- 
tofllTifcr'^'^'' ers (mostly Englishmen), and amounting to 
• • $7,200,000, must be remitted to the owners at 
once. This demonstration of the impolicy of liberating and 
sending abroad more than $7,000,000 of specie at a time 
when we were likely to need every dollar of coin that the 
country contained had not the smallest effect on the anti- 
Federalist faction, except to increase their fury. Mr. Desha, 
a representative of Kentucky (February 12, 181 1), con- 
sidered this foreign capital one of the engines set to work to 
overturn civil liberty. He had no doubt that George III 
was a principal stockholder and that the latter would author- 
ize his agent in this country to bid millions for a renewal 
of the charter. The new charter was not wanted except 
by a few speculating merchants who had become involved 
in debt and had borrowed money from " this foreign bank." 
The only way to save liberty, in his opinion, was "to 
assist in strangling this infant Hercules in the cradle." 
He concluded by suggesting that, unless the British gov- 
ernment should rescind its clandestine measures affecting 
our rights, rather than renew the charter of the bank we 
ought to confiscate the British capital in it and use it in 
conquering Canada. 

The government had sold its own property in the bank 

to forjeigners at a large premium. The last sale of 2220 

shares had been made in 1802 at 145 to 

The Government's Sir Francis Baring, who had resold them 
Shares in the . ^ , , _, , , , 

Bank. 1^ England at 150. The purchasers bought 

them as shares in an active concern. Of 

course, they were charged with knowledge that the charter 

would expire in 18 11 and that it might not be renewed; 

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but it was not creditable in congressmen to declaim against 
foreign holdings as a reason for refusing a charter, when 
the government had pocketed a bonus of nearly $700,000 
from these same foreigners in the expectation that it would 
be renewed. 

The bank was not without friends among the Republi- 
cans. The best speech made for the new charter was that 
of Senator Crawford of Georgia,* — a masterly effort from 

nearly all points of view. Senator Lloyd of 
Debate"*^ Massachusetts made a strong speech on the 

same side, supplying some interesting items of 
banking intelligence. As showing the great convenience to 
the government of an apparatus by which payments could be 
made at specie value everywhere, without cost for the trans- 
mission of funds, he said that Penobscot bank notes would 
not pass in Boston at all times, that Boston bank notes 
passed with difficulty in J»Tew York and Philadelphia, while 
those of New York were not readily current in Washington. 
Mr. Clay held that Congress had no power to grant the 
original charter or to renew it. On March 2 he presented a 
report denpng a petition of the bank for an extension of its 
charter sufficiently long to wind up its affairs. The report 
says that, " holding the opinion (as a majority of the com- 
mittee do) that the Constitution did not authorize Congress, 
originally, to grant the charter, it follows as a necessary con- 
sequence of that opinion, that an extension of it, even under 
the restrictions contemplated by the stockholders, is equally 
repugnant tp the Constitution." Five years later he was a 
strong advocate of the charter-of the second Bank of the 
United States, saying that " that which appeared to him in 
181 1 under the state of things then existing not to be neces- 
S3,ry to the general government, seemed now to be necessary 
under the present state of things. Had he then foreseen 
what now exists and no objection had lain against the 

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renewal of the charter other than that derived from the 

Constitution, he should have voted for the renewal." ^ 

The vote was taken in the House January 24, 181 1, on a 

motion to postpone indefinitely, which motion prevailed by 

a majority of one, — 65 to 64. The vote in the Senate on a 

< similar bill (February 20) was a tie, — 17 to 
Charter refused. 

17, — whereupon Geofge Chnton, the Vice- 
President, gave the casting vote against the bank. It was 
accordingly put in liquidation. It paid the shareholders 
$434 for each share of $400, />., a surplus of nearly 9 per 
cent. Thus the country lost a most valuable financial insti- 
tution. There was straightway a mushroom growth of new 
state banks to fill the void, so that one hundred and twenty 
were chartered and put in operation within three years. 
The government went to war in 18 12, leaning upon the 
state banks for financial support. Most of them suspended 
payments in September, 18 14, after which the country 
wallowed in irredeemable paper for several years. If the 
charter of the great bank had been renewed in 181 1, 
specie payments would probably have been maintained 
throughout that crisis. Mr. Gallatin, writing many years 
later, said : 

It is our deliberate opinion that the suspension might have 
been prevented at the time when it took place had the former. 
Bank of the United States been still in existence. The exagger- 
ated increase of state banks, occasioned by the dissolution of that 
institution, would not have occurred. That bank would as before 
have restrained within proper bounds and checked 

Mr. Gallatiii's ^j^gj^ issues, and through the means of its offices 
Opinion. ° 

(branches) it would have been in possession of 

the earliest symptoms of the approaching danger. It would 

have put the Treasury Department on its guard; both acting 

in concert would certainly have been able at least to retard the 

^ Annals of Congress y 18 1^-18 id^ p. 1194. 

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event, and as the treaty of peace was ratified within less than six 
months after the suspension took place, that catastrophe would 
have been altogether avoided. 

By restraining 'the issues of the state banks within proper 
bounds Mr. Gallatin meant that the bank would have pre- 
sented their notes promptly for redemption, thus keeping 
their issues within the limit of safety. 


The first Bank of the United States was devised by Alex- 
ander Hamilton. It was one of a series of financial meas- 
ures through which that statesman sought to bind the people 
of the newly formed Union together, by giving them certain 
pecuniary interests in common. The bank's charter was 
supported by the Federalist party and opposed by the anti- 
Federalists, or Republicans. It became a law in February, 
1 79 1, and the bank was put in operation in the following 
December. The capital was $10,000,000, of which $2,000,000 
was subscribed by the government. The private subscriptions 
were payable within two years in half-yearly instalments ; 
that of the government in ten equal annual instalments, 
with interest at 6 per cent. The charter of the bank was 
limited to twenty years, and the. government agreed to 
charter no other bank during that period. 

The bank was a great financial success. It paid dividends 
during the term of its existence, averaging 8| per cent per 
annum, and accumulated a surplus equal to about 9 per cent 
of its capital, which was eventually distributed to its share- 
holders. The parent bank was in Philadelphia, with seven 
branches in cities on the Atlantic seaboard and one in New 
Orleans. It collected the bonds of importers for customs 
duties and made transfers of money at the order of the 
Treasury, without expense to the government. It also made 

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290 BANKING # 

advances of money to the government, when required, at the 
customary rate of interest It served the purpose of a regu- f 
lator of the currency by maintaining the highest standard of 
commercial honor, — a standard to which other banks were 
obliged to conform under penalty of being discredited in the 
eyes of the business community. 

When its charter was about to expire the bank applied to 
Congress for a renewal of the same. The Federalist party 
was now in the minority, and its opponents made the grant- 
ing of the proposed new charter a political issue. The state 
banks joined the opposition because they wished to get rid 
of the competition of the great bank and its braftches. In 
the last year of its existence the bank was made a football 
of politics. Its usefulness from a financial point of view 
received very little attention in the debate on the recharter. 
The final decision was adverse to it, by a majority of one 
vote in the House and a tie in the Senate. 


Clarke and Hall's Legislative and Documentary History of the 
Bank of the United States, 

Hamilton's Writings^ edited by H. C. Lodge. 

Henry Adams' Life of Albert Gallatin. 

Gallatin's Writings^ edited by Henry Adams. 

Von Hoist's Constitutional History of the United States. 

Sumner's History of Banking in the United States. 

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The second war with Great Britain began in 1812. Specie 

payments were suspended in September, 18 14, by nearly all 

the banks south and west of New England. 

Financial Dis- Their notes fell to a discount ranging from 
tress in 1814. ^ 

10 to 30 per cent. The government had 

defaulted on the interest .of the public debt. Its money was 

mainly in the suspended banks. The financial condition of 

the country was desperate.^" Naturally the statesmen of the 

day bethought themselve% of the Bank of the United States. 

On the 17th of October the S^ecretary of the Treasury, Mr. 

Dallas, recommended that a national bank 
pr^owT^^*""^ be established with a capital of $50,000,000, 

of which one-tenth should be specie and the 
remainder government securities of one kind and another. 
It was to begin under a suspension of specie payments. As 
Daniel Webster said in the debate : " It was to commence 
its existence in dishonor; it was to draw its first breath in 
disgrace." Webster's speech of January 2, 18 15, was fatal to 
this bill, for it was rejected by a tie vote. A reconsideration 
was moved and carried, and the bill was amended by striking 

1 " The government might possess immense resources in one State 
and be totally bankrupt in another ; it might levy taxes to the amount 
of the whole circulating medium yet have only its own notes available 
for payment of debt ; it might borrow hundreds of millions and be none 
the better for the loan." — Henry Adams* History of the United States y 
VIII, 215. 


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out the clause requiring a specific loan to the government 
and the one authorizing the suspension of specie payments. 
In this shape it was passed by both houses; but it was 
vetoed by President Madison because it did not furnish 
sufficient financial aid to the government. The Senate 
thereupon took up the original Dallas Bill and passed it on 
February 11. But news that a treaty of peace with Great 
Britain had been signed at Ghent reached Washington on 
the 13th, and on the 17th the House, by a vote of 74 to 73, 
indefinitely postponed the measure. 

As the war had come to an end, the Treasury was no 
longer in the desperate condition of the preceding year ; yet 
Mr. Madison, in his message of December 5, 18 15, sug- 
gested a national bank as an instrumentality for bringing 
about a resumption of specie payments. A bill for this 
purpose was reported to the House by Mr. Calhoun on 
January 8, 18 16. It passed both houses and was signed by 
President Madison on April 10, 18 16. The capital was to 
be $35,000,000, — four-fifths to be subscribed 
u^*ofSi6 ^***'" ^y private persons and one- fifth by the United 
States. There were to be twenty-five direc- 
tors, five of whom should be appointed b)r^ the President of 
the United States, by and with the advice and consent of 
the Senate, and twenty elected by those stockholders who 
resided in the United States. Foreign stockholders could 
not vote either in person or by proxy. Both the notes and 
the deposits of the bank were to be paid in specie. It-was 
authorized to issue post notes not smaller than $100 each, 
payable not more than sixty days after date. No circulating 
notes were to be issued of less amount than $5.00. All 
notes were to be signed by the President and the principal 
cashier. The notes should be receivable in all payments 
to the United States. The bank was to provide facilities 
for transferring the public funds, without expense to the 

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government, to any places within the United States where 
payments were to be made. Section 16, regulating the 
public deposits, provided: 

That the deposits of the money of the United States in places 
in which the said bank or branches thereof may be established 
shall be made in said bank or branches thereof, 
eposi 8. yjjjggg ^Yit Secretary of the Treasury shall at any 
time otherwise order and direct ; in which case the Secretary of 
the Treasury shall immediately lay before Congress, if in session, 
and if not, immediately after the commencement of the next 
session, the reasons of such order or direction. 

The bank was forbidden "to purchase any public debt 
whatsoever." In case the bank should fail to pay any note, I 

obligation, or deposit, in specie on demand, it ] 
tions^ ^**^*'*" ^^^ ^^ forfeit 12 per cent per annum on the! 

amount of the claim. The government's sub- 
scription of $7,000,000 could be paid either in money or in 
its own obligations bearing 5 per cent interest. It was, in 
fact, wholly paid by the latter, />., by a stock note, and the 
note was not fully paid until 1831. The bank was to pay 
the United States the sum of $1,560,000 as a bonus for 
the charter, wfiich was to be exclusive and was to continue 
twenty years. It was forbidden to pay dividends to stock- 
holders whose shares were not fully paid for. The directors 
were authorized to establish branch banks wheresoever, in 
the United States or the territories thereof, they should 
see fit. 

Of the foregoing regulations the most important was the 
one which required the deposits to be paid in specie. 

Strictly speaking, all obligations payable in 
to s^cVe^*^*^^* dollars were payable in specie. There was 

no other legal-tender money than gold and 
silver coin. Yet the conception prevailed universally that 
while a bank ought to pay its notes in specie on demand, it 

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might properly pay its deposits in the notes of other banks, 
near or remote, provided the latter paid their notes in 
specie. Consequently, even when the banks were solvent, 
there were two kinds of currency in circulation in every 
city : (i) specie and the notes of the local banks, which were 
at par ; (2) the notes of banks of other cities and states, 
which were at a discount greater or less according to the 
difficulty of securing their redemption. This discount was 
not observed by the masses of the people. To them one 
dollar was as good as another. Anything that, would pass 
was gladly accepted. But to merchants the discount on 
out-of-town bank notes was a considerable expense, and 
they sought to recoup themselves by charging enough for 
their goods to cover the loss. Daniel Webster was opposed 
^ to the pending bill in any shape, but he struck a blow for 
sound principles of currency by securing the adoption of an 
amendment providing that the deposits as well as the notes 
of the Bank of the United States should be paid in specie. 
It did not abolish everywhere the bad practice of having 
two kinds of bank notes in circulation at the same time and 
place, — one at par and the other at a discount, — but it 
abolished it in the operations of the great bank, and it 
established a standard of good banking which was never 
wholly lost sight of, and which reached its fulfillment in the 
Suffolk Bank system a few years later. Mr. Webster made 
another contribution to sound finance during this session of 
Congress by securing the passage of a bill 
Taxes^ ^°^ requiring the payment of all government dues 

in specie, or in Treasury notes, or in notes of 
the Bank of the United States. Previously, any bank notes 
that were current at the places where the duties and taxes 
were collected hiad been accepted by the Treasury, although 
no banks except those of New England were at that time 
paying specie. 

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The power of the bank to issue post notes was curtailed 

in the charter, both as to the size of the notes and the time 

they should run. Post notes were bank notes 
Post Notes. , , , , , ^ 

payable, not on demand, but at a future time. 

They were a means of borrowing money from the public for 
fixed periods with or without interest. They were in common 
use in the first quarter of the nineteenth century. Some- 
times the words containing the date of payment were printed 
in very small type, so that they were not readily seen and 
were accepted by some persons for demand notes. The 
recipients were thus defrauded. The restriction of post 
notes to denominations of $100 or more was made in order 
to prevent deception, since anybody receiving a note as large 
as $100 would be pretty sure to examine it carefully and to 
know whether it was payable on demand or otherwise. 

The provision requiring that all notes issued by the bank 
should be signed by the president and the principal cashier 

was adopted because that was the customary 
Branch Drafts. r • • , rr^i . • 

way of issumg such notes. There was a simi- 
lar provision in the charter of the earlier bank. The fact 
that there are physical limitations on the power of a man to 
write his name, and that this bank was three and one-half 
times as large as the former one, did not occur to anybody 
until after the bank had gone into operation. Then it was 
discovered that no human being could perform the necessary 
labor. The bank officers asked Congress to amend the law 
so as to allow other persons to sign notes. There was no 
reason why the request should not have been granted, but 
Congress took no action. Consequently the bank adopted 
the practice of issuing drafts of $5.00 and $10 at the several 
branches, drawn on the parent bank. These drafts passed 
into circulation, to the amount of several millions. When 
the subject of a recharter of the bank came before Congress 
the issuing of these drafts was assailed as a violation of law, 

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but an opinion had been obtained from Horace Binney, 
Daniel Webster, and William Wirt, before any such drafts 
were issued, that they would be legal. 

The provision in reference to the deposit of the public 
funds in the bank became very important in the subsequent 
bank war in President Jackson's administration, and will be 
considered in connection with that event. 

The clause imposing a penalty of 12 per cent per annum 
on any failure to pay specie on demand for any obligation 
of the bank was intended to make the suspen- 
Suspensicm ^^^^ ^^ specie payments unprofitable. There 

were in existence at that time many banks 
which were doing a flourishing business and actually paying 
dividends to their stockholders, but were not redeeming 
their own notes, or paying their deposits, except in the 
depreciated notes of other banks. If they had been under 
a penalty of 12 per cent per annum on all their defaulted 
paper, they would have made haste to resume specie payments. 

It would not be good policy now to grant exclusive privi- 
leges to a single bank, but if for any reason it were granted, 
it would be proper to exact a bonus from the 
c^rter^' beneficiaries. The exclusive privilege granted 

to the Bank of the United States consisted of 
the deposits of the government without interest, of the right 
to establish branches without consulting the state govern- 
ments, and of the credit which those extensive privileges 
gave it in the eyes of the people and of foreign nations. 

The bank established twenty-five branches under the 

authority granted to it. These were extremely useful to the 

country in the way of distributing the capital 

Branch Banks. ^ , , , 1 , t -^ 

of the bank to the places where it was most 
needed. Thus, if there was a stronger demand for money 
at New Orleans than at Philadelphia, knowledge of that fact 
would be quickly conveyed by the branch at the former 

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place to the parent bank, and funds could be quickly trans- 
ferred, either from the parent bank or from any branch where 
the demand was less pressing. One advantage of branch 
banking consists in the facility which it affords for gaining 
knowledge of the relative needs of business in different 
places and of responding promptly to those needs through 
agents already on the ground possessing the necessary local 
knowledge. The benefit is shared equally by the borrower 
and the lender. Branch banking tends to equalize the rates 
of interest among different localities in the same country. 

The charter of the bank was made the basis of a shame- 
ful speculation, which brought it to the verge of ruin within 
two years. The law provided that the stock 
Berinnings subscriptions of individuals should be paid in 

three instalments : 30 per cent at the time of 
subscribing, 35 per cent in six months, and 35 per cent in 
twelve months. One-fourth of the private subscriptions 
($7,000,000) were to be paid in specie and three-fourths in 
specie or in the funded debt o{ the United States. When 
the second instalment became due only $324,000 was paid in 
specie where $2,800,000 was due ; and for the third, only a 
trifling amount of specie or of anything else. The bank had 
discounted the notes of the stockholders on the pledge of 
their stock to the amount of more than $8,000,000. It 
also allowed the stock to be sold and transferred by the 
subscribers before it was paid for. This caused a great 
deal of trading in shares and a rapid advance in the price. 
When they rose above par the bank loaned more than par 
on them. In August, 18 17, it authorized loans as high as 
$125 on $100 to shareholders who would furnish other 
security for the extra $25. This was easily furnished, as 
the shareholders indorsed for each other. 

The provision of the charter prohibiting dividends on 
shares that had not been paid in full had been systematically 

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violated. The Baltimore branch had been defrauded, by its 
president and cashier, of $1,600,000. The bank at this 
time was really insolvent and it was held up only by the 
government's deposits, which amounted to $8,000,000. It 
was saved from impending bankruptcy by Mr. Langdon 
Cheves of South Carolina, who became its president in 
March, 18 19. One of his measures of relief was the bor- 
rowing of $2,500,000 in Europe. Another was the require- 
ment that the loans made on the security of the bank's 
shares should be paid at the rate of 5 per cent every sixty 
days. " Even this small reduction,'* said Mr. Cheves in his 
first official report, " was the subject of loud, angry, and con- 
stant remonstrance among the borrowers, who claimed the 
privileges and favors which they contended were due to 

The bank was put in a solvent condition by Mr. Cheves, 
and in the course of the next ten years became established 

in the confidence of the business community 
^^i^sf *^^ and interwoven in the policy of the nation as 

fully as the leading banks of the old world 
are now in their respective countries. It had five hun- 
dred employees of high standing and social position. Of 
Nicholas Biddle, its president from 1823 to 1839, a contem- 
porary historian said: 

No American had such European repute. Jackson's was the 
only one comparable, and that far inferior to it. Flattered, 
caressed, extolled, idolized in America, Biddle was praised and 
respected in Europe as the most sagacious and successful banker 
in the world. Governors, senators, legislators, judges, clergymen, 
ladies thronged his bank parlor and by fulsome adulation entreated 
his favors. His town house and his country house were the seats 
of elegant hospitality in which he shone with the blandishments 
of a polished gentleman, amiable, witty, liberal, never harsh or 
offensive to antagonists, but spoiled by sycophants of the highest 

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rank. Chambers of Commerce, boards of brokers and other rep- 
resentatives of trading associations, cities, corporations and sov- 
ereign states courted his support and solicited his favors.^ ( 


The second Bank of the United States was established in 
18 1 6, at the instance of President Madison, to put an end to 
the disorders in the currency consequent upon the War of 
181 2. The capital was $35,000,000, of which $7,000,000 
was subscribed by the government. During its early years 
the bank was shamefully mismanaged and narrowly escaped 
destruction, but it was restored to a sound position in the 
year 18 19, after which it became extremely prosperous. 
The charter was for the most part a copy of that of the first 
bank. The money owned or collected by the government 
at places where the bank or its branches existed was to be 
deposited in the bank or branches, but the Secretary, of the 
Treasury might remove the same for reasons which he 
should communicate to Congress. Both the deposit^and 
the notes of the bank were required to be paid in specie. 
The notes of the bank were receivable for all public dues. 
No dividends could be paid to shareholders until their 
subscriptions were fully paid. The bank might establish 
branches wherever it should choose, but was required to 
have one in each state which should request it. It estab- 
lished twenty-five branches. The charter. was limited to 
twenty years. The bank accomplished the objects for 
which it was created. It brought about the resumption of 
specie payments and put an end to the disorders and fluctu- 
ations of the currency which had previously prevailed. It 
had acquired the confidence of the public, both at home 
and abroad, in the highest degree at the time of General 
Jackson's first election as President in 1828. 

^ Ingersoll's History of the Second War with Great Britain^ II, 285. 

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The charter of the great bank, granted in 1816, was to 
expire in 1836. When General Jackson came to Washington 
City as President in 1829, ^^^ subject of a renewal of the 
charter had not been discussed either in Congress or in 
the press. Probably nobody had given it serious thought. 
There had, however, been some conflicts be- 

aReSer""* ^^^^^ ^^^ ^^"^ ^"^ *^^ state legislatures of 
Ohio, Kentucky, and Georgia, prompted by the 
jealousies of the local banks. The latter had accused the 
great bank of " accumulating their notes " and then present- 
ing tj;iem for redemption in coin, thus making money scarce 
and disabling them from lending freely to their own cus- 
tomers. But this accumulating of the notes of the local 
banks resulted from receiving them as deposits. Not to 
have received them would have discredited, and perhaps 
ruined, the banks issuing them. To have received them as 
deposits and not to have presented them for payment would 
have been to transfer the capital of the great bank to the 
local banks without interest. From this dispute had arisen 
hostile legislation and prolonged litigation; but the con- 
flicts had ceased, and the bank was at the height of its 
popularity and strength at the beginning of Jackson's admin- 

The first visible sign of the coming trouble was contained 
in a letter written by Levi Woodbury, senator from New 
Hampshire, to Samuel Ingham, Secretary of the Treasury, 


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making complaints against Jeremiah Mason, one of the 
great jurists of New England, who was the president of the 
branch bank at Portsmouth. Woodbury and Mason were 

political rivals. The former accused the latter 
^utiSi Conflict. ^^ ^^^ manners, of partiality in the making of 

loans, and of using his financial influence for 
political ends. Mr. Ingham referred the letter to Nicholas 
Biddle, president of the bank, and added some comments 
of his own, implying that he thought there might be some 
truth in Woodbury's complaints. 

Three weeks later Mr. Isaac Hill of New Hampshire, 
second comptroller of the United States Treasury, wrote a 
letter asking for a change in the board of directors of the 
Portsmouth branch of the bank and for the rem oval of Mr. 
Mason as president. The letter was addressed to two of 
Hill's friends in Philadelphia, who were requested to present 
to the parent bank two petitions to that end, signed by citi- 
zens of New Hampshire, which were inclosed in his letter. 

Hill had been the editor of a rancorous Demo- 
Isaac Hill. 

cratic newspaper and latterly president of a 

small bank in Concord, for which he wished to secure the 
pension deposits, which were placed by law in the Ports- 
mouth branch of the great bank. 

A few months later Amos Kendall, fourth auditor of the 
Treasury, wrote a letter to Ingham, making accusations, 
which were afterwards shown to be false, .against the Louis- 
ville branch of the bank, charging that it had 
Amos Kendall. . . j . . . 00 

interfered in an election there in 1825. These 

letters proved that there were politicians in Wiishington, near 
to the President, who had private and sinister ends to gain 
by attacking the bank. They accomplished their object, by 
persuading him that the bank was taking part in politics 
secretly and against himself. The charge was false : the 
bank never meddled with politics until compelled to do so 

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in self-defense. It is possible, however, that its enemies 
believed that it was doing so.^ 

The influence of Hill, Kendall, and other intimate friends 
of Jackson, his so-called " Kitchen Cabinet,*' was seen in 
his first annual message to Congress in December, 1829, ^^ 
which he said : 

The charter of the Bank of the United States expires in 1836, 
and its stockholders will most probably apply for a renewal of 
their privileges. In order to avoid the evils result- 
Jackson's First jjjg irom precipitancy in a measure involving such 
Message. ^ ... t 1 1 

important • prmciples, and such deep pecuniary 

interests, I feel that I cannot, in justice to the parties interested, 
too soon present it to the deliberate consideration of the Legisla- 
ture and the people. Both the constitutionality and the expediency 
of the law creating this bank are well questioned by a large portion 
of our fellow-citizens ; and it must be admitted by all, that it has 
failed in the great end of establishing a uniform and sound currency. 

Deliberate and premeditated hostility to the bank was 
disclosed in this paragraph. The charter had still seven 
years to run. As a question of practical statesmanship the 
renewal of it was altogether premature. The subject was 
dragged in before its time with malice aforethought. The 
statement that " the constitutionality and the expediency of 
the law creating this bank are well questioned by a large 
portion of our fellow-citizens " was a figment of the imagi- 
nation. Whatever might have been the state of opinion 

1 " When, in any arena, a power is present which might be of decisive 
importance as an, ally of one party or the other, it is inevitable that its 
alliance will be contended for by them. Its efforts to remain neutral 
will be vain and will expose it to greater danger from both than an 
alliance with either. Either party which thinks that it has lost the 
chance of winning the alliance will turn against the intervening party 
with fierce animosity and will try to destroy it, or drive it from the 
arena. This is what happened in the case of the United States 
Bank. " — Sumner's Banhing^ p. 192. 

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before or afterwards, there was none such at that time. If 
there had been, it would have found its echo in Congress, 

but it did not. The statement that the bank 
!^nte!^^**" ^^^ "failed in the great end of establishing a 

uniform and sound currency" was glaringly 
untrue. The bank had been established expressly to restore 
specie payments. This end had been accomplished mainly 
through its efforts and example. In order to facilitate 
resumption it had assumed at par $10,809,000 of govern- 
ment deposits then in suspended banks, at a cost to itself 
of some $200,000.^ The whole banking system of the 
country had been wonderfully toned up since it came into the 
field. The rate of exchange between the most widely sepa- 
rated commercial centers ranged between par and one-half of 
I per cent, — a condition which, according to a report of the 
Senate Committee on Finance, existed in no other country.^ 
On December 10 the part of the President's message 
relating to the Bank of the United States was referred by 
the House to the Committee of Ways and Means. Its 
chairnnan (McDufiie of South Carolina) made a report on 
April 13, 1830, controverting, in respectful and temperate 

1 Clarke and Hall, 777. 

2 " Before this bank went into operation exchange was from eight to 
ten per cent, eitljer for or against Charleston, which was a loss, to the 

planter, of that amount on all the produce of Georgia 
g^®*** ®' *^® and South CaroUna and indeed, you might say, all the 

produce of the Southern and Western states Since 

I last wrote you I had a conversation with a gentleman in the confidence 
of some of the moneyed men of the North, and he says they are deter- 
mined to break up the Bank of the United States, to enable them to 
use their money to advantage ; as that institution gives so many facili- 
ties to the community as to deprive them of their former profits. . . . 
If I were sure the bank would not be rechartered, I would convert my 
property into money with a view to dealing in exchange. I could make 
a vast fortune by it." — Letter of a Charleston merchant to the chair- 
man of the Committee of Ways and Means (Clarke and Hall, 760). 

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terms, the President's position at all points. The report 
was strong in its opposition to the statement that the bank 
had failed in the great end of establishing a uniform and 
sound currency. It was easy to prove by the market quo- 
tations how far superior the currency was then to that 
of any previous time, and especially to that 
brc^ongr^i"** of the period immediately before the establish- 
ment of the bank, when the paper currency of 
the middle states ranged from 7 to 25 per cent below par. 
The report went beyond a mere statement of the fact that 
the currency had been put on a uniform and sound basis. 
It argued strongly that this improvement had been brought 
about by the Bank of the United States and would not have 
taken place otherwise. It said : 

The Committee are aware that the opinion is entertained by 
some that the local banks would, at some time or other, either vol- 
untarily or by the coercion of the state legislatures, have resumed 
specie payments. In the very nature of things this would seem 
an impossibility. It must be remembered that no banks ever 
made such large dividends as were realized by the local institu- 
tions during the suspension of specie payments. A rich and 
abundant harvest of profit was opened to them, which the resump- 
tion of specie payments must inevitably blast. 
The Previous While permitted to give their own notes bearing no 
interest, and not redeemable in specie, in exchange 
for better notes bearing interest, it is obvious that the more paper 
they issued the higher would be their profits. The most powerful 
motive that can operate upon moneyed corporations would have 
existed to prevent the state banks from putting an end to the very 
state of things from which their excessive profits proceeded. 
Their very nature must have been changed, therefore, before they 
could have been induced to cooperate voluntarily in the restora- 
tion of the currency. It is quite as improbable that the state 
legislatures would have compelled the banks to do their duty. . . . 
The banks were, directly and indirectly, the creditors of the 

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whole community, and the resumption of specie payments neces- 
sarily involved a general curtailment of discounts and withdrawal of 
credit which would produce a general and distressing pressure upon 
the entire class of debtors. These constituted the largest portion 
of the population of all the states where specie payments were sus- 
pended and bank issues excessive. Those, therefore, who controlled 
public opinion in the states where the depreciation of the local 
paper was greatest were interested in the perpetuation of the evil. 

The report of the Committee was sustained by a decisive 
majority of the House, and a similar one from the Senate 
Committee on Finance was sustained by that body. 

There was some correspondence between Biddle and 
Ingham in reference to the charges made by Woodbury and 
Hill against Jeremiah Mason. Biddle easily proved that 

the charges were without foundation. It would 
^^ffcllf"** have been well for him if he had rested there ; 

but he thought that he had, detected in Ing- 
ham's letters the assertion of a right on the part of the 
administration to control or influence the bank's selection 
of its officers, and he wished to let Ingham know that this 
was a mistake. He therefore added that the bank was 
under no responsibility to the Secretary of the Treasury 
respecting the political opinions of its officers. Ingham 
retorted that the Secretary had power to remove the govern- 
ment's deposits from the bank, and that he might exercise 
that power, if he were convinced that the bank was exer- 
cising political influence. In his literary and forensic zeal 
Biddle had overlooked the power of coercion that lay in the 
hands of the Secretary. He was worsted in this encounter, 
but his error of tactics was not necessarily fatal. 

In his message of 1830 the President again alluded to the 
bank, and suggested that a bank might be established as a 
branch of the Treasury Department, in order to avoid con- 
stitutional objections. Such a bank, h^ said, having no 

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means to operate on the hopes, fears, or interests of large 
masses of the community, would be shorn of the influence 

which made the existing bank formidable. A 
aage^f^is^'**' 'potion was made in the House to refer this 

part of the message to a special committee, 
on the ground that the Committee of Ways and Means 
had already given its opinion in favor of the present bank. 
This motion was voted down, by io8 to 76. 

In 183 1 the message took a. milder tone, saying that the 
President had felt it his duty frankly to disclose his opinions 

on the subject in former messages. 

the President. Having thus conscientiously discharged a con- 

stitutional duty [he continued], I deem it proper 
on this occasion, without a more particular reference to the views 
on the subject then expressed, to leave it for the present to the 
investigation of an enlightened people and their representatives. 

If the bank had had only its political enemies to deal 
with, it might have come off unharmed. Ingham had retired 
from the Treasury and was succeeded by Louis McLane, a 
warm friend of the bank. Four of the six members of -the 
Cabinet were friendly to it, and Jackson himself now seemed 
disposed to cease his war on it.^ But the bank also had 

1 " To the last Mr. Biddle was strongly advised not to press the 
recharter when it was done. Mr. Livingston, Secretary of the State, 
Mr. McLane, Secretary of the Treasury, and I believe General Cass, 
Secretary of War, as well as Mr. Barry, Postmaster-General, General 
Smith, John Forsyth, Mr. Wilkins, Mr. Dallas, the Pennsylvania senators, 
nearly all that portion of the Republican party which sustained the 
bank counselled delay. Let the President have time and his friends 
opportunity for reasoning with him. Do not force, do not hurry him. 
Wait the event of his election. Let him be the author instead of the 
destroyer of a bank. Edward Livingston was constant in belief and 
assurances that if conciliated and not constrained the rugged chieftain 
-would yield on fair and reasonable terms. The Attorney-General, 
Mr. Taney, was the only open cabinet opponent of the bank." — 
Ingersoll, II, 268. 

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friends, who made demands upon ir. The chief of these was 
Henry Clay, who was nominated for President in opposition 
to Jackson in December, 1831. He was the dictator of his 
own political party, and he was determined to make the 

recharter of the bank a party issue. The 
fhe^niT^*"* legislature of Pennsylvania, a strong Jackson 

state, had passed resolutions, by a nearly 
unanimous vote, in favor of rechartering the bank. This led 
Clay to believe that, if the bank would take the aggressive, 
it would be easy to turn that state and the business inter- 
ests of the country in general against Jackson in the coming 
campaign. He even thought that Jackson was trying to 
avoid the bank issue until after the election. " The Execu- 
tive," he said, in a letter dated December 25, 183 1, **is 
playing a deep game to avoid, at this session, the responsi- 
bility of a decision on the bank question." 

Entertaining these views and having the power to shape 
the issues of the campaign on his own side, he caused a 

plank to be put in the Baltimore platform, 
lomot^tB f ^^ declaring that the bank was a great, beneficent, 

and necessary institution, and that the Presi- 
dent was " fully and three times over pledged to the people 
to negative any bill that might be passed for rechartering 
the bank." Even after this provocation Jackson nominated 
Biddle as one of the government directors of the bank. 

The bank had been, untiPthis time, a non-resistant, and 
that wa5 one reason why Jackson's animosity had cooled. 
It was still reluctant to enter the political arena./ Biddle 
hesitated, but was finally persuaded by the argument that 
the bank must put itself in the hands of its friends rather 
than of its enemies. Accordingly, he wrote a memorial ask- 
ing for a renewal of the charter, which was presented to the 
Senate on the 9th of January, 1832. The old charter still had 
four years to run. The motion for a renewal of it at this 

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time was premature, unless the friends of the bank wanted 
to make it a political issue against Jackson in the presidential' 

Before any vote was taken in Congress, however, an inci- 
dent occurred which led Jackson to think that the bank was 

financially unsound. On the 24th of March, 
^pwcentf ^^3^' ^^' Asbury Dickins, Acting Secretary 

of the Treasury, notified Mr. Biddle confiden- 
tially that the government desired to apply a portion of its 
money deposited in the bank to the payment of the out- 
standing 3 per cents, — a remnant of the revolutionary debt. 
The public deposits now amounted to $12,000,000, and the 
debt to be paid off was $9,000,000. Secretary McLane 
gave Mr. Biddle formal notice of this purpose on the 25th 
of July, and Biddle replied that the bank would take the 
necessary steps to get possession of the bulk of the 3 per 
cents and would act in accordance with the wishes of 
the government. In the meantime General Cadwalader, a 
director of the bank, had been sent to London to make a 
private arrangement with the Barings for postponing the 
payment of $5,000,000 of the debt. A contract was made 
with that house to extend as many of the 3 per cents as 
possible and to buy up the rest. This was a violation of 
the bank's charter, which prohibited it from purchasing any 
public stocks. It was equally a violation of the under- 
standing with the Treasury; since, under the Baring con- 
tract, the 3 per cents would be kept alive, tlie bank 
paying the interest and being responsible eventually for the 

1 " The position then was that Jackson had made the challenge, had 
receded from it, and his opponents had taken it up and turned it as a 
challenge against him. What would he do ? It seems that no one who 
knew the facts in his career could doubt what he would do. He would 
return to the issue and would fight it out regardless of all considerations 
whatever, to a definite and conclusive victory or defeat. That is what 
he did do." — Sumner's Banking, p. "200. 

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principal. Money was worth 7 per cent to the bank; and 
by this scheme it would obtain the use of the government's 
money at 3 per cent. 

It was Biddle's intention to keep the matter secret, but 
the Baring circular was published in the newspapers in 
October. Biddle immediately disavowed Cadwalader's con- 
tract with the Barings, in so far as related to the buying of 
the debt, and proposed a different arrange- 
DupUcrty*'* ment. Secretary McLane called on Biddle 
for explanations, and the latter replied that he 
had taken this step for the public good. A visitation of 
cholera was expected, which threatened, he said, " if it con- 
tinued, to press with peculiar force on the public revenue, 
more especially as the demand on account of the foreign 
holders of 3 per cents on the first of October, at New York 
and Philadelphia alone, would have exceeded five millions 
of dollars." So the bank had interposed itself as a provi- 
dence between the people and the government because 
the cholera was expected, and had done so in a clandes- 
tine manner. Jackson was fully justified in considering 
this a subterfuge, and was freshly exasperated by it; 
but it did not follow, as he supposed, that the bank was 

The affair of the 3 per cents was going on while Con- 
gress was acting on the new charter. On the 9th of June 
the bill passed its third reading in the Senate, by 25 to 20. 
Now the friends of the bank, who were also friends of the 
President, made one more effort to prevent a conflict. They 
entreated Mr. Biddle to pause and let the bill rest until after 
the election. If he had had his choice, he might have taken 
this advice; but he was "threatened with opposition from 
the party, then his chief reliance, unless he went on." ^ 
They said that Jackson would not dare to veto the bill, and 
1 IngersoU, II, 269. 

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that if he did, he would be hurled from power by an indig- 
nant people. So they passed the bill in both houses and 
sent it to the President on the 6th of July. Then one 

more challenge was given to him. The House 
pawed*^^' on the 28th of June had voted to adjourn on 

the 9th of July, and the resolution was not 
acted on by the Senate until the 9th. Then Mr. Webster 
said that there was an important measure under considera- 
tion by the Executive, which he was not compelled to return 
in less than ten days. The House resolution was then 
amended, by inserting the i6th. This was equivalent to 
saying to the President : " You must sign the bill or veto it. 
You shall not kill it silently.'* 

The next day, July 10, the veto came. It was perfectly 
adapted to its purpose of winning votes. It dealt with the 

bank as a monopoly, ringing all possible 
vetoed**^^' changes on that term, and in the most skillful 

manner. It is supposed that Amos Kendall 
wrote it ; for, although Jackson was no demagogue, this was 
a most demagogical appeal. The friends of the bank were 
in high glee when they saw it. Biddle wrote to Clay : 

I have always deplored making the bank a party question, but 
since the President will have it so, he must pay the penalty of his 
own rashness. As to the veto message, I am delighted with it. 
It has all the fury of a chained panther biting the bars of his cage. 
It is really a manifesto of anarchy, such as Marat or Robespierre 
might have issued to the mob of the Faubourg St. Antoine ; and 
my hope is that it will contribute to relieve the country from the 
dominion of these miserable people. You are destined to be the 
instrument of that deliverance, and at no period of your life has 
the country ever had a deeper stake in you. I wish you success 
most cordially, because I believe the institutions of the Union are 
involved in it* 

1 Parton's Life of Jackson^ III, 411. 

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This was not the first time that Biddle's literary talents 
had betrayed him. Four months later he and Mr. Clay and 
the bank went down with a grand crash, for 
v^ct^'^ Jackson was reelected by 219 electoral votes, 

to 67 for all others. Mr. Clay received 49. 
Nobody at the present day considers Biddle a good banker. 
Few persons regret the Bank of the United States ; but if 
its taking off was a national misfortune, Mr. Clay and his 
party were as much to blame as General Jackson and his 
party. They made the bank a political issue at a time when 
defeat to them meant destruction to it. The attempt to pass 
the bill over the veto failed in the Senate, 22 to 19. 

The bank war continued through the whole of Jackson's 
second administration, embracing several exciting episodes, 
but they belong rather to the political than the financial his- 
tory of the time. Early in 1833 the President 
removed*^^*** decided that the government's deposits ought 
to be rfemoved from the bank. He suggested 
this project to Secretary McLane, who demurred. The mat- 
ter was brought up in the Cabinet, and two-thirds of the 
members sided with McLane. A vacancy happening in the 
State Department, McLane was transferred to it, and William 
J. Duane was appointed Secretary of the Treasury. Duane 
had been opposed to the original charter of the bank and to 
the recharter, but he looked upon the public deposits as a 
part of a contract between the government and the bank. 
He declined to transfer them, when requested by the 
President to do so. Consequently he was removed from 
office, and Roger B. Taney, the Attorney-General, was 
placed at the head of the Treasury Department. Taney 
began, in the autumn of 1833, to draw out the money 
for ordinary disbursements, depositing the ordinary receipts 
in certain state banks which had been selected for the 

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312 • BANKING 

When all hope of a renewal of the national charter had 
disappeared, Mr. Biddle sought and obtained a charter from 
the state of Pennsylvania. An enormous bonus was paid 
to the state, — $2,500,000 in cash and a promise of $100,000 
per year for twenty years, besides various subscriptions to 
the stock of railroads, canals, and turnpikes in the state. 
Senator Benton said that every circumstance of its enact- 
ment betokened bribery of the members who passed it and 
an attempt to bribe the people by distributing the bonus 
among them. The government was still a shareholder in 
the bank to the par value of $7,000,000, and 
vanirch^er there was some trouble in withdrawing this 
money, but it was paid in four annual instal- 
ments at the rate of 1 15.58. New stock was sold in place of 
it, so that the capital remained at $35,000,000, which was a far 
greater sum than could be used in ordinary banking opera- 
tions in its restricted territory. Jackson's plans were now 
fully carried out, except that the bank was not killed. The 
government had recovered every dollar of its own money, 
and the bank was on the way to kill itself more miserably 
than even its enemies could have wished. 

When the bank found itself, with its enormous capital, 
restricted* to Philadelphia and the neighboring country, it 
gradually changed its character. Hitherto it 
latioif^^^"' ^^^ confined itself to its proper business, dis- 

counting commercial paper, buying bills of 
exchange, and dealing in coin and bullion. Now it advanced 
money largely on stocks. Before March, 1836, it had 
$20,000,000 thus invested. The country was in the fever 
of speculation which culminated in the panic of 1837, and 
the bank was the leading speculator. It suspended in 1837, 
in common with nearly all the other banks ; again in 1838 ; 
and a third and last time in 1841. Its liquidation was pro- 
tracted through fifteen years. It paid its creditors in full. 

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principal and interest, but the shareholders lost every penny. 

Biddle lost all of his own money. His town house and his 

country house were sold by the sheriff. Old 

Final Collapse fiends cut him on the street He was even 

of the Bank. 

indicted by the grand jury for conspiracy to 

defraud the shareholders of the bank, but the indictment 

was quashed. He died in 1844, poor and broken-hearted. 


The second Bank of the United States became involved 
in political strife through no fault of its own. In the year 
1829 certain politicians, who were on terms of intimacy 
with President Jackson, desired to have the president and 
directors of the branch bank at Portsmouth, N. H., removed 
for their own private ends. Mr. Biddle, the president of 
the parent bank, refused to comply with their wishes. They 
persuaded the President that the bank was secretly taking 
part in politics adversely to himself. Although the charter 
had seven years still to run, President Jackson, in his first 
message to Congress (December, 1&29), made a hostile ref- 
erence to the bank, suggesting doubts as to its constitution- 
ality and affirming that it had failed of the main purpose 
for which it was established. Both houses of Congress took 
action upon the message, in a sense favorable to the bank. 
In ^830 the President again referred to the bank in his 
annual message, but his tone was less hostile than before. 
In 183 1 he approached the subject again, but in a still milder 
way, saying that he should now leave the question to the 
enlightened judgment of Congress and the people. 

The party opposed to Jackson mistook his change of tone 
for a symptom of fear, and decided to make the recharter 
of the bank the main political issue of the presidential cam- 
paign of 1832. They framed their platform accordingly 

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and nominated Henry Clay for the presidency. Jackson 
accepted the challenge and resumed his fight against the 
bank. While the political contest was going on, Congress 
passed a bill for a new charter, the President vetoed it, arid 
the attempt to pass it over the veto failed. President Jack- 
son was reelected by a large majority in 1832. In the fol- 
lowing year he caused the government's deposits in the 
bank to be removed from it. Before the charter expired the 
president of the bank obtained a charter from the legis- 
lature of Pennsylvania and reorganized the bank under it 
with the same capital ($35,000,000). This was too large a 
sum to be profitably employed in the discount of commercial 
paper in Philadelphia. The bank then entered into various 
speculations by advancing money on the shares of joint 
stock companies in all parts of the Union. It failed dis- 
astrously in 1 84 1, and the shareholders lost their entire 
capital. The government had ceased to be a stockholder 
in 1836, its shares haying been paid off at a premium of 
15^ per cent. 

Both the first and the second banks of the United States 

became involved in political strife without any intention of 

their own, and in spite of their earnest efforts to avoid such 

^ entanglements. It therefore seems probable that any other 

* bank of the same kind would be exposed to the same danger 

and would succumb to the conflicts incident thereto. 

Authorities for Chapters VII and VIII 

Parton's Life of Andrew Jackson. 

Sumner's Life of Andrew Jackson, 

Schurz's Life of Henry Clay. 

Belles' Financial History of the United States. 

Bourne's History of the Surplus Revenue of i8jy. 

Duane's A^arrafife a fid Correspondence. 

Von Hoist's Conslitutiona! History of the United States. 

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The growth and development of banking in Massachusetts 
not only form an interesting chapter in our economic his- 
tory, but give us suggestions of the highest importance in 
the consideration of current banking problems. 

During the first half of the nineteenth century there was 

a struggle in Massachusetts, as in nearly all the states, to 

compel the subscribing shareholders of banks to pay for 

their shares. Banking was the favorite form 
stock Notes. . , . * , i , , . 

of speculation. A bank lends its notes to 

borrowers and receives interest on them, but the notes are 
themselves debts of the bank. Thus banking presented 
itself to the public mind seductively as a method of living 
on the interest of the debts you owe. Bank charters were 
eagerly sought. The speculators in shares were not slow to 
perceive that, if they could put their own stock notes into 
the bank instead of cash, they might get something for noth- 
ing.^ If the bank survived, the dividends would probably 
exceed the interest on the stock notes, the difference being 
a clear gain to the shareholders, without any investment of 
their own money. The policy of Massachusetts in this 
regard was generally sound, but it was variable, showing that 
some people could get inserted in bank charters privileges 
which others could not get. In 1795 the charter of the 
Nantucket Bank contained a provision that no stockholder 

^ Professor Sumner found two state bank charters, both in Louisiana, 
which expressly authorized the payment of the capital in stock notes, 
one dated 181 1 and the other 18 18. — History of Banking y p. 61. 

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should be allowed to borrow at the bank, as or after any 
instalment should become due, until he should have paid 
his full proportion of such instalment. This did not, how- 
ever, prevent borrowing the money after it had been paid in. 
In the following year the Merrimac Bank of Newburyport 
was chartered with a capital stock of not less than $70,000, 
nor more than $150,000. Here we find an attempt to evade 
the principle affirmed in the charter of the Nantucket Bank. 
No loans were to be made to shareholders until they had 
paid their proportion of $70,000. If they should choose to 
have a capital of $150,000, they might borrow from the bank 
itself all except the first $70,000. 

There was much contrariety of legislation until 1804, when 

several charters contained an express provision that no 

money should be loaned to anybody until satisfactory evi- 

1 dence was presented to the governor and council " that the 

1 whole capital stock aforesaid is actually paid in and existing 

in gold, silver, or other coined metals, in their vaults." Even 

this provision was not sufficient ; for it was 

struggle to proved in more than one case that banks bor- 

compel Pajnnent , , . r 1 . • ^ • 

of Capital Stock, rowed the entire amount of their capital in 

gold and silver coin from other banks and, 

having exhibited it to the public officers, returned it to the 

rightful owners the same day. Accordingly, in 18 1 1, a clause 

was inserted in bank charters requiring the directors to take 

an oath that the money paid in was intended to remain there 

as the capital of the bank. This proviso was considerably 

amplified and strengthened in 18 13. Three commissioners 

were to be appointed by the governor to count the gold and 

silver and take the oath of the directors that it had been 

paid in, bona Jide, by the stockholders as the bank's capital 

and for no other purpose, and that it was intended to remain 

there. In 1822 it was enacted that no dividends should be 

declared until the whole capital was paid in. 

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The currency was now very chaotic. Country bank notes 
were at a discount of i to 5 per cent in Boston, according 
to the difficulty of sending them home for redemption. It 
was an advantage to a bank to place itself at a long distance 
from the centers of business and on the worst possible road, 
to avoid redemption.^ Sharpers and speculators seized the 
opportunity to make gains. They bought or established 
banks for the purpose of putting notes in circulation at long 
distances from their place of issue, in order to postpone the 
redemption of them. They swapped notes with each other 
for this purpose. The Boston Exchange Office 
hiN?wEnS^^*d^ ^^^ incorporated in 1804 to facilitate the busi- 
ness of swapping bank notes. One Andrew 
Dexter bought up the stock of the Exchange Office and used 
it as a machine for swapping the notes of different banks 
owned or controlled by him, till he brought ruin upon the 
banks, the community, and himself. His failure was one 
of the most direful events in the economic history of New 

The New England Bank, which was incorporated in 18 13, 
gave the first impulse to what was afterwards known as the 
Suffolk Bank system, by publishing an adver- 
EngtonrBank tisement that it would receive country bank 
notes and send them home for redemption, 
charging only the actual cost. The average cost on those 
of Massachusetts was one-half of i per cent This became 
the rate of discount on such notes in Boston. On those of 
other New England banks it ranged from i to 5 per cent. 

The country banks discounted commercial paper in Boston, 
as well as at home, paying out their own circulating notes 
therefor. As these notes were below par in Boston, but 

1 " What New England did in the first decade of the century is what 
the middle states did in the second and the Southwest in the fourth and 
the Ohio states in the sixth." — Sumner's History of Bankings p. 37. 

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were generally accepted by merchants, Gresham's Law came 
in play ; that is, the worse money drove out the better. The 
notes of the Boston banks were immediately returned to them 
by depositors, because they were received at par, but those 
of the country banks were paid out by manufacturers and 
traders for wages and as change, and thus kept in circulation. 
In the year 1818, when the Suffolk Bank was chartered, the 
Boston banks, seven in number, having more than half of 
the banking capital of New England, had only one twenty- 
fifth part of the circulation. The New England Bank had 
reduced the cost of redeeming country bank notes to a 

minimum before the Suffolk entered the field 
The Suffolk Bank. 

but the cost was borne by the note holders. 

The Suffolk managers conceived the idea of putting the cost 
of redeeming them on the issuers, and of abolishing the dis- 
count entirely. Its object was to make a profit for itself, 
but it accomplished much more, as the sequel will show. • 
The plan proposed by the Suffolk was that it would redeeni 
any New England country bank notes at par if the issuing 
banks would keep a permanent deposit of $5000 in the 
Suffolk Bank (the interest on which should compensate it 
for doing the business), plus a further deposit sufficient to 
redeem such of their notes as should reach Boston in the 
course of trade. 

To the country bankers of that day nothing more exas- 
perating than this plan could have been imagined. They 

declined it because it seemed likely to curtail 
Country Banks their circulation and the profits derived there- 
iii' B^tonf^''^"' from. Then the Suffolk began to collect their 

notes systematically and send them home for 
redemption in specie. The country banks were furious. 
They said that the Suffolk was demanding of them an 
impossibility, — that of redeeming their notes in two places 
at once. The Suffolk had demanded no such thing. It 

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had merely offered them the alternative of redeeming their 
notes in Boston or at their own counters. The fight was 
bitter. The Suffolk maintained it at first single-handed. 
In 1824 the other Boston banks became convinced that it 
was time to put an end to the uncurrent money that was 
displacing their own notes in the field of circulation. They 
joined the Suffolk and contributed a large fund to enable 
the latter to extend its operations to all parts of New 
England. The run on the resisting banks was continued 
until they began to come in and make the deposits 
required. The terms offered were that each country bank 
should make a permanent deposit with the 
i^o^sr^^ Suffolk of $2000 or upwards, according to the 
' amount of its capital, and such additional sum 

as might be necessary to redeem all of its notes that should 
come to Boston. From banks which complied with these 
conditions the Suffolk offered to receive at par the notes of 
any New England bank in good standing. In other words, 
the Suffolk would not require the country bank to remit 
drafts on Boston payable in specie to make its balance good, 
but would accept as specie the New England notes which 
the country bank was habitually receiving in the course of 
its business. Thus the Suffolk became a clearing house for 
the notes of New England banks in Boston, balancing them 
against each other every day. When the notes were sorted 
and redeemed they were placed in packages and held subject 
to the order of the issuing bank. 

In 1845 the state of Massachusetts passed a law provid- 
ing that no bank should pay over its counter any notes but 
its own, and this law remained in force until the national 
banking system superseded the Suffolk system. As no bank 
could pay out the notes of any other bank, it was compelled 
to send those which it took on deposit to the Suffolk at 
once for redemption. This law enforced the principle that 

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everything paid over a bank's counter must be the equiva- 
lent of specie. The whole Suffolk system was based on this 
principle, and the battle which it started was fought in order 

to enforce it. A slovenly idea had pervaded the 
Suffolk system whole country that specie redemption, although 

good in theory, was bad in practice. This 
conception was only slowly uprooted, first in New England, 
afterwards in New York, and later in Louisiana and in some 
other spots, but it held the ground over the larger part of 
the country until the Civil War. Mr. D. R. Whitney, in his 
history of the Suffolk Bank, says : 

It was the underlying principle of the Suffolk Bank system, 
that any bank issuing circulation should keep itself at all times in 
a condition to be able to redeem it; that it should measure the 
amount by its ability so to do ; and that the exercise at any time 
of the right to demand specie of a bank for its bills was something 
of which the issuing bank had no right to complain. 

Nevertheless, there were some complaining banks all the 
time, though after the system had been fairly established 

these were only a small minority. The panic 
an/su^ess*^ of 1837 caused a general suspension of specie 

payments. When the time came for a general 
resumption, the question of renewing the Suffolk system 
was open to debate. The banks of Massachusetts, New 
Hampshire, Vermont, and Connecticut voted at once to 
sustain it, whilst those of Maine and Rhode Island came 
in soon afterwards. The Suffolk Bank system gave wide 
credit to the New England banks, and in consequence their 
notes gained an extensive circulation in remote parts of the 
country and in Canada. In 1857 five hundred banks were 
embraced in the system. 

Under such circumstances the Suffolk took upon itself 
the office of a comptroller of the currency. It did not 
admit a new bank to the fellowship of the system merely 

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because it had procured a charter, perhaps by favoritism, 
perhaps by bribery. It first satisfied itself that the share- 
holders were men of good character and that the institution 
had been started in good faith. Of course, the Suffolk 
could not prevent the newcomer from issuing notes, but it 
could withhold its passport and thus prevent it from getting 
any extensive circulation. The precautions which it took in 
admitting newcomers were taken for the credit and good 
name of New England banking. 

The Suffolk Bank suffered some losses in consequence 
of advances to country banks, but these did not prevent it 

from declaring dividends at the average rate 
Small Losses. 

of 1 1^ per cent per annum. The losses which 

it incurred from counterfeits and alterations in notes were 

very small. From 1836 to 1846 the losses by counterfeit 

notes were only $1107, from alterations $766, and from 

counterfeit signatures on genuine notes $82, although the 

redemption at that time exceeded $100,000,000 per year. 

In 1824 two clerks could do all the work. In 1855 seventy 

were required, and the redemptions reached $400,000,000 

per year. As the circulation of the New England banks at 

that time was about $40,000,000, the whole amount was 

redeemed ten times each year, or about once in five weeks. 

Any person engaged in a legitimate trade, in any part of 

New England, could exchange his promissory note,- running 

sixty or ninety days, for the notes of a bank, 
Priflcipfe*^^'**^ with which he could pay the wages of his 

employees or buy the materials of his indus- 
try in any part of the United States or Canada. The notes 
would remain in circulation about five weeks, and then find 
their way to the Suffolk Bank, where they were offset by the 
notes of other banks which took their rise in the same way. 
The man whose promissory note the bank had discounted, 
and by means of which it had put its own notes in circulation, 

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had meanwhile sold his products. If he had sold them in 
Boston, his draft on the Boston merchant would pay his 
note at the local bank, and this would enable the latter to 
keep its balance good at the Suffolk. If he had sold them 
in New York or Chicago, he would get his pay in a draft on 
Boston, which would answer the same end. If he had sold 
them at home and had received New England bank notes 
in exchange for them, the local bank could use these to 
keep its balance good at the Suffolk. New England trade 
was carried on by an endless chain of offsets and book 
balances at the Suffolk Bank. The security for the notes 
consisted of the bank's assets and the banker's moral 
character and business sagacity. Both notes and deposits 
rested upon the same security that deposits rest upon now, 
and the volume of both was determined by the wants of 

The foregoing method of issuing circulating notes is 
called the "banking principle," — a term used in contra- 
distinction to the " currency principle," which 
Pri^cip?e*™^ assumes that a certain amount of paper cur- 
rency will be wanted by the community at all 
times and that the government may advantageously issue 
it, either directly or through an agency like the Bank of 
England. As the latter principle is now operative in Eng- 
land, the average amount which will always circulate and 
which the community will never send in for redemption if 
satisfied of its goodness, is first ascertained experimentally. 
If, in the progress of time, more notes are wanted than the 
ascertained sum, they must be bought with gold. Thus 
the Bank of England is required to give its notes for all 
the sovereigns offered to it, or for gold bullion of equal 
value. In like manner the Treasury of the United States 
must issue gold certificates to all persons tendering Ameri- 
can gold coin to it. 

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Under the Suffolk system of bank-note redemption, specie 
was seldom asked for, but it was always paid when de- 
manded. The metallic reserve was the touch- 
specie Reserve. 

stone of the whole business. The banks 

learned by experience how many notes would circulate and 
how much specie was needed. It was not until 1858 that 
the state of Massachusetts, in consequence of the panic of 
1857, established a legal reserve of 15 per cent of specie 
against both deposits and circulation. Country banks might 
count their balances in Boston banks, payable on demand, 
as specie, for experience had shown that notes were best 
redeemed at a common center, where the gold reserve 
should be kept. Prior to the passage of the law of 1858 
the specie reserve had been extremely variable, rang- 
ing from 44 per cent in 1843 to 7^ per cent in 1851. 
There was a heated controversy over the passage of this 
law. The bankers were generally opposed to it, on the 
ground that it was unnecessary meddling, but public opin- 
ion sustained it. After the passage of the law the specie 
reserve rose considerably above the legal requirement and 
afterwards oscillated around it, being sometimes a little 
more, and sometimes a little less, than 15 per cent. This 
law did not touch the other New England States, whose 
banks were integral parts of the Suffolk system. In 1859 
Maine, Rhode Island, and Connecticut each had 10 per 
cent of specie as against circulation and deposits. New 
Hampshire 7 J per cent, and Vermont only 6 per cent. 

The Suffolk Bank system continued until it was super- 
seded by the national banking system, which required each 
bank to receive the notes of every other bank at par for all 
dues to itself. 

Massachusetts enacted general banking laws in 1805, in 
1828, in 1835, in i860, and in 1880. Her banking law, as it 
existed before the national system came in force, consisted 

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of two parts, one relating to chartered banks, and the other 
to free banks. A free banking law, which allowed persons to 
organize banks at their own pleasure, on condition of deposit- 
ing with the state officers bond security for 
Sa?^w"' ^^'^^^ circulating notes, had been passed in 
185 1, but only seven banks were organized 
under it. The following were among the provisions of law 
relating to banks in i860 : No individual could hold more 
than one-half the stock of any bank ; no person could be a 
director of more than one bank ; no person could be a director 
whose stock was pledged for debt Neither the debts nor the 
credits of a bank could exceed twice the capital stock paid 
in, except for deposits and for debts to or from other banks. 
No bank could pay out any notes but its own ; or issue any 
notes, directly or indirectly, except at its own banking 
house ; or issue any notes with the understanding that they 
should be kept out a certain length of time. No bank could 
make a loan repayable in anything except specie or its own 
notes. In case of bank failure the note holders were to 
have a prior lien on the assets. If any new banks should be 
chartered with greater privileges than those here enumerated, 
the same privileges were to extend to all other banks. Three 
bank commissioners were appointed to examine all banks, 
once each year — or oftener if they deemed it expedient — 
and to publish the results of such examinations. 


In the first quarter of the nineteenth century the notes 
of country banks were at a discount in all the commercial 
centers. If the discount was not excessive, they passed from 
hand to hand in trade, but they were not received by the 
city banks except at their actual value. . The notes of the 
city banks, on the other hand, by reason of their goodness, 

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were promptly returned to them as deposits or in payment 
of loans. Under the operation of Gresham's Law the worst 
money that would circulate drove out the better. The Boston 
banks, although possessing more than half the banking 
capital in New England, had only one twenty-fifth part of 
the circulation. Country bank notes accumulated in the 
hands of merchants, and they either sold them to brokers or 
sent them by messengers to the issuing banks for redemp- 
tion. The discount in Boston on the notes of Massachu- 
setts country banks averaged J per cent. On those of the 
other New England States it ranged from i to 5 per cent 
according to the distance of the banks and the cost of 
securing redemption. 

The Suffolk Bank of Boston was chartered in 18 18 as an 
ordinary bank of issue and deposit. Its managers con- 
ceived the idea of making a profit out of the redemption of 
country bank notes. They offered to redeem all such notes 
at par, if the issuing banks would provide funds for that 
purpose and would also make permanent deposits in the 
Suffolk B^nk, the use of which should compensate it for its 
troubl^/ At first only a few of the country banks acceded 
to this proposal. The Suffolk Bank then sent home for 
redemption all the notes of the non -assenting banks that it 
could get. The other Boston banks joined the Suffolk and 
contributed a fund for carrying on the campaign in all the 
New England Statesi^ Eventually all the country banks were 
forced into the arrangement, because it was found to be 
cheaper to redeem their notes in Boston than at home. 
They found also that under the Suffolk system their credit 
was so much improved that their notes gained circulation in 
all parts of the United States and Canada. The system was, 
in fact, advantageous to them as well as to the public. 

When the system had been thoroughly established, the 
Suffolk Bank accepted the notes of all solvent New England 

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banks at par and offset them against each other, thus serving 
as a clearing house for New England bank-note issues. 
The legislature of Massachusetts testified its approval of 
the system by passing a law prohibiting banks from paying 
out any notes but their own, thus making it necessary to 
send to the Suffolk for prompt redemption the notes of 
other banks which came into their hands. 

The redemptions, or clearings, at the Suffolk Bank reached 
the sum of $400,000,000 per year. As the total circulation 
of New England banks at that time was only $40,000,000, it 
followed that the notes were redeemed, on the average, ten 
times each year. The Suffolk system continued until 1865, 
when it was superseded by the national banking system. 
It brought banking in New England to a state of responsi- 
bility, order, and solvency unknown before. 


Whitney's History of the Suffolk Bank. 
Stetson's History of the State Bank. 

Root's New England Bank Currency ("Sound Currency" 

Knox's History of Banking in the United States. 
Reports of Bank Commissioners of Massachusetts. 

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New York has made two contributions of the first impor- 
tance to banking science : (i) the safety fund system, or 
mutual insurance of circulating notes ; (2) the free bank, 
or bond deposit, system for securing circulating notes, which 
was the precursor of the national banking system. 

During the first half century banking in New York was 
an integral part of the spoils of politics. Federalists would 
grant no charters to Republicans, and Republicans none to 
Federalists. After a few banks had been established they 
united, regardless of politics, to create a monopoly by pre- 
venting other persons from getting charters. 
PoU«cr*^ When charters were applied for and refused, 

the applicants began business on the common- 
law plan. Then, at the instigation of the favored ones, the 
politicians passed a law to suppress all unchartered banks. 
The latter went to Albany and bribed the legislature. ' In 
short, politics, monopoly, and bribery constitute the ke^ to 
banking in the early history of the state.] 

The Bank of New York, described in a previous chapter,^ 
was controlled by Federalists. As the an ti- Federalists knew 
that the legislature would not grant a charter to them, 
Aaron Burr conceived the idea of procuring one by stealth. 
The city had recently been scourged with yellow fever, the 
ravages of which were attributed in part to the bad water. 
Accordingly a petition was presented for a charter for a 
^ See page 272. 

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company with a capital of $2,000,000 to supply New York 
City with pure water. C^n it was a clause authorizing the 
company to use any surplus of capital, over and above the 
amount needed for the water works, in any 
Compimy^*^'^ moneyed transactions not inconsistent with 
the constitution and laws of the state or of the 
United States.^ The Council of Revision (of which John Jay 
was president), whose approval was necessary, did not suspect 
that banking powers were concealed in the charter* The 
charter was granted, and the company applied one half of its 
capital to water works and the other half to the banking 
business. >5%is was the Manhattan Company, which ceased 
to be a water compaiw in 1840, but has continued as a bank 
to the present day. / 

When the Republicans came into power they refused all 
applications for bank charters to Federalists ; and the existing 
banks, of which there were six in the state prior to 1804, 
made common cause to prevent any new ones from entering 
the field. In that year the Merchants' Bank of New York 
City, which was already in operation under the common 
law, applied for a charter. It was refused. The bank 
bought its way through the legislature amid scenes of excite- 
ment, which included fist fighting in open session. In 181 1 
the Bank of America repeated the operation on a larger 
scale. In 182 1 the people of the state sought to put an 
end to these scandals by a clause in the constitution of that 
year requiring a two-thirds vote of both branches of the 
legislature to pass a bank charter, but the only effect was 
" to increase the evil by rendering necessary a more extended 
system of corruption." ^ 

In 1828 forty bank charters were in force, out of forty- 
three which had been granted, three small country banks 
having become insolvent. The charters of thirty of the 

1 Hammond's History of Political Parties in the State of New York, 

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survivors were about to expire, and all efforts to renew them 

had failed to secure the necessary two-thirds vote. The 

legislature was determined to impose on the banks some 

new conditions, in the public interest. At 
Joshua Pornum. 

this juncture (January 24, 1829) Mr. Joshua 

Forman of Syracuse addressed a letter to Martin Van 
Buren, governor of the state,\proposing a plan for the 
mutual insurance of banks) His suggestion was that each 
bank should be required to contribute annually to a common 
fund for the payment of the debts of such banks as should 
fail, this contribution to continue till it should reach half a 
million dollars and be kept up to that sum by further con- 
tributions when needful.^ * 

Mr. Forman's plan was adopted, and a law was passed 
providing that every bank whose charter should be granted 
or extended thereafter should pay into a "bank fund", 

one-half of i per cent of its capital each year, 
System^^'^^ until the contributions should be equal to. 

3 per cent of its capital stock. This fund 
was to be applied solely to the payment of the debtsi^exclu- ' 
sive of the capital stock) of failed banks belonging to the 
system. The fund was not to be used, however, until the 
assets of the failed bank had been exhausted and the defi- 
ciency determined by judicial proceedings. Whenever the 
fund should be reduced in this way, the comptroller was to 
call on the banks for fresh contributions, at the same rate, 
as to time and amount, as the original ones. The same act 
provided for the appointment of three commissioners to 
examine all the banks three times each year, or oftener if 
required to do so. Any three banks might call for a special 
examination of any bank in the system. 

In 1837 three safety fund banks, all in the city of Buffalo, 
were reported to be in difficulties. The legislature passed a 
law authorizing the comptroller to make immediate payment. 

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out of the bank fund, of the notes of any insolvent bank 
whose liabilities, in excess of assets, should not exceed 
two-thirds of the amount in the bank fund. This law was 
applied to the three Buffalo banks. There was no deprecia-- 
tion of their notes, and the bank fund was restored out 
of the assets of the failed banks. Two other banks went 
into liquidation soon afterwards, and their notes were paid 
and the fund replenished in the same way. There were no 
more failures till 1840. During that and the two following 
years eleven banks failed. The fund was now about $900,000, 
of which $600,000 was applicable, under the law of 1837, 
to the immediate redemption of circulating 
^I'S' "" ^^t^S' ^^^ remainder being reserved for deposi- 
tors. The first three banks in the order of 
failure exhausted this sum. The bank commissioners, 
I in their annual report for 1841, said that the bank fund 
was primarily intended for the protection of note holders, 
not depositors or general creditors. The fact that the law 
put all creditors on the same level was not understood by 
the public or by the bankers themselves, and its expediency 
was called in question. In 1842 the law was amended, so 
that after the payment of all the liabilities charged against 
the fund at that time the note holders should have the first 
lien on it. 

In the constitution of 1846 note holders were made pre- 
ferred creditors of all failed banks. This valuable principle 
had been adopted by the state of Connecticut in 1831. 
The law of that state, however, gave the 
preference only to the holders of notes of the 
, denomination of $100 or less. One reason why note holders 
ought to be preferred creditors of failed banks is that 
usually it is not a matter of choice whether persons shall 
or shall not accept bank notes offered in payment This is 
especially true of the poorer and more helpless classes of 

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the community, who are liable to lose situations, or favor, 
or patronage, if they make objections to the kind of money 
offered to them, and who are less able to form opinions for 
themselves on the soundness and standing of particular 

Unfortunately the charges against the bank fund before 
the act of 1842 took eifect were sufficient to absorb 
everything it was likely to receive from the J per cent 
annual contribution for several years. Accordingly the 

state issued its own stock for $900,000 to 
^ues^^^"* ^^^'' "^^^^ prompt payment to the creditors of the 

failed banks, taking a lien on the fund for 
"repayment; and eventually the state's advances were all 
reimbursed out of the fund, principal and interest. More- 
over, the fund redeemed about $700,000 of notes fraudu- 
lently overissued, — a consequence of the lack, in the origi- 
nal act, of any system of public registration. The whole 
amount of payments into the safety fund was $3,104,999. 

The faults of the safety fund system were errors of 
detail. The fund should have been liable only for circulat- 
ing notes. By attempting too much, the system broke down. 
When a bank failed the redemption of its notes from the 
fund should have been immediate, so that the note holders 
should not lose by delay and depreciation, and the fund 
should have been reimbursed later out of the assets of ^he 
failed banks and the legal contributions of the solvent ones. 
On the assumption that the circulation only ought to bef 

protected, the contributions to the fund should! 
the^System ^^^^ been proportioned to the circulation, and; 

not to the capital stock, of each bank. The 
notes should have been issued to the banks only by the state 
comptroller, and duly recorded. In his report for 1848, 
Millard Fillmore, the comptroller, said that **the Safety 
Fund would have proved an ample indemnity to the bill 

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332 ^ BANKING 

holder had it not been applied to the payment of other 
debts of the banks than those due for circulation." ^ 

Although the safety fund system has passed away in the 
place of its birth, it is alive and in high esteem in a neigh- 
boring country. It was adopted in Canada in 1890, in order 
to secure the prompt redemption of the notes of failed banks, 
/>., to avoid a discount on the notes of such banks pending 
liquidation. Under the Canadian system the circulating 
notes are the first lien on the assets, and it is believed that 
the assets will always suffice to redeem the notes; but the 
delay in converting them into cash, prior to the establish- 
ment of the safety fund, had led to a temporary discount 
on such notes. The maximum amount of the fund is 5 

per cent of the outstanding circulation of all 
in^CaM^da^ ^°^ ^^^ Canadian banks, and it must be kept up to 

this maximum, the Minister of Finance having 
power to call on the banks for additional contributions, when 
necessary, not exceeding i per cent in any year. When the 
assets of failed banks are paid in, however, refunds may be 
made to the contributing banks of the excess over 5 per cent. 
Under the Canadian law the notes of failed banks draw 
interest at 6 per cent until redeemed. They are therefore 
eagerly received by the other banks, and there has been 
no depreciation on any such notes since the system was 

1 Mr. L. Carroll Root {Sound Currency, Vol. II, No. 5) has verified 
Mr. Fillmore's statement by an independent examination of the figures. 
" It is plain," he says, " as a result of calculation from experiments of 
36 years (1829-1865), that, had the Safety Fund system — as perfected 
prior to and in the constitution of 1846 — been left untouched as that 
upon which New York State bank currency was based, not merely 
would every dollar of circulation have been kept good, but the total 
assessment to keep the fund good would have averaged less than \ per 
cent on the banking capital, or about f per cent on the average circu- 
lation outstanding." 

..™Coo,e ^ 



The safety fund system of New York was a mutual 
insurance of banks, established by law in the year 182^ , for 
the protection of their creditors. It required an annual 
contribution by all the banks in the state of a sum equal 
to J per cent of their capital, until the fund should reach 
3 per cent thereof, out of which the remaining indebtedness 
of insolvent banks was to be paid after their assets were 
exhausted, — the contributions to be renewed from time to 
time at the same rate when necessary. The first bank failures 
that took place after the system was adopted occtirred in 
1837. ^ ^^w was then passed by the legislature authorizing 
the immediate use of the money in the fund for the redemp- 
tion of the noteso f failed banks, provided the amount called 
for did not exceed two-thirds of the whole fund then in 
hand. The notes of the failed banks were redeemed imme- 
diately, and they suffered no depreciation. In 1840-42 
eleven banks failed, and the consequent demands to meet 
the claims of both note holders and depositors were too 
large to be satisfied out of the money in the fund. In 1842 
a law was enacted that, after the existing claims were paid, 
the fund should be applied only t_Q the redemption of the 
circulating notes of failed banks. This change came toQ^ 
late to be of service ; for the claims on the fund were larger 
than could be met out of the annual contributions for several 
years. In the meantime the policy of the state in reference 
to banks was radically changed by the constitution of 1846, 
which prohibited the granting or extension of any special 
charters for banks. As all of the safety fund banks were 
in this category, the system was doomed to extinction when 
the existing charters expired. All the claims against the 
fund were eventually paid in full, including the redemption 
of a large amount of notes fraudulently issued, and an 

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unclaimed balance of $13,144 was turned into the state 
treasury. The last charters of safety fund banks expired 
in 1866. 

Experience under the safety fund system showed thjit 
the original act was defective in the following particulars: 
(i) it should have required public registration of note issues 
to prevent fraud ; (2) note holders should have been made 
preferred creditors of failed banks ; (3) the safety fund 
should have been applied only to the redemption of circu- 
lating notes ; (4) the fund should have been applied to this 
purpose immediately upon the failure of any bank (to prevent 
depreciation of its notes), instead of awaiting the results of 
liquidation of its affairs. All of these changes were made 
by amendments to the law or the constitution of the state 
between the years 1837 ^^^ 1846. If they had been 
embodied in the original act, there would never have been 
any loss to note holders under the system, by depreciation 
or otherwise. 

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The next change in the banking system of New York 
was even more radical than the one described in the pre- 
ceding chapter. Until 1838 banking had 
system'***^^^ remained a monopoly. Nobody could get a 
charter without a special act of the legis- 
lature, and nobody could invest even $100 in a new bank 
without the consent of the bank commissioners of the 
state. When a charter was granted these officials parceled 
out, as a matter of favoritism and partisan spoils, the rights 
to subscribe for shares. Contention and heart burning 
were the necessary consequence, and no persons were more 
keenly alive to the disgrace than the bank commissioners 
themselves, who said in their report of 1837 : 

The distribution of bank stocks created at the last session has 
in very few, if any, instances been productive of anything like 
general satisfaction. In most instances its fruits have been vio- 
lent contention and bitter personal animosities, corrupting to 
the public mind and destructive of the peace and harmony of 

These scandals caused nearly universal disgust and led 
to a revolt in the Democratic party in 1835. A faction 
sprang up calling themselves the Equal Rights party, known 
afterwards as the "Locofocos." They adopted a platform 
in which they declared " hostility to any and all monopolies 
by legislation, because they are violations of the equal rights 
of the people." As the Democratic party took no steps to 


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reform the evils complained of, the Locofocos joined the 

Whigs and carried the elections in the city of New York in 

the autumn of 1&36 and the spring of 1837, as well as the 

state election in the autumn of the latter year, securing a 

I large majority of the legislature. This victory 

Political Revolt. ,, irt ,. , ro«, • 

1 led to the free banking law of 1838, the motive 

I for it being political rather than financial. A suggestion 
for such a system had been made eleven years earlier by 
the Rev. John McVickar, professor of political economy in 
Columbia College, in a letter written to a gentleman in 
Albany and published in a pamphlet. Professor McVickar 
proposed that any individuals or associations might enter 
into the bankirig business freely, but that nine-tenths of their 
capital should be invested in government stock, of which 
the bank should receive the interest, though the principal 
should remain in the custody of the state as security for 
the circulating notes of the bank. The remaining tenth of 
the capital might, however, be invested as the officers of the 
bank should see fit. 

The free banking law of New York was introduced in 

I the legislature by Mr. Abijah Mann. As amended and 
passed, it provided that any person, or association of per- 
sons, might receive from the comptroller circulating notes, 
and after signing them might issue them as money by first 
depositing with him stocks of the United 
Free Banking g^^^^^^ ^^ ^^^ ^^^^ ^^ ^^^ York, or of any 

other state approved by the comptroller, made 
equal to a 5 per cent stock of the state of New York, or 
bonds and mortgages on improved, productive, and unincum- 
bered real estate, worth double the amount of the mortgage, 
exclusive of the buildings thereon, and bearing interest at 
not less than 6 per cent per annum. The banks might 
deposit stocks only, or half stocks and half bonds and 
mortgages, and the printed notes should specify to which 

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class they belonged. In case default should be made in\ 
the redemption of any such notes, the comptroller was to 
sell the securities and apply the proceed5-t€bthe redemption | 
of the notes. The state was not in any way responsible 
for the payment of the notes beyond the proper appli- 
cation of the securities to that purpose. The persons or 
associations depositing the securities were to receive the 
interest on them as long as they redeemed their notes on 
demand, unless in the opinion of the comptroller they had 
depreciated so as to be no longer adequate security. 

The bill became a law, on April 18, 1838. There was an' 
immediate rush of people into the banking business. One ! 
hundred and thirty-three new banks were organized, and 
seventy-six started in business before December i, 1839. 
Experience under the new system was at first disastrous 

The Bank of Tonawanda failed in 1840, an 
A Bad Beginning. . . . ,. t t . 

Its secunties realized only sixty-eight cents o: 

the dollar of its outstanding notes. This example led to a 
change of the law regarding stock securities, which were 
now restricted, as to banks subsequently established, to 
those of New York. The mortality of the free banks was 
so great, by failure or voluntary liquidation, that in 1842 
only forty-six remained in operation. In 1844 the comp- 
troller reported that twenty-six free banks had failed, and 
that their circulation has been redeemed at the average rate 
of seventy-six cents on the dollar. 

The practice of issuing notes at interior towns by indi- 
viduals residing in New York City, or even in other states, 
was soon discovered to be prevalent. Hence, a law was 
passed in 1840 requiring that all country banks should 
redeem their notes in New York City or Albany at a dis- 
count not exceeding one-half of i per cent. As they usually 
passed at par, a man could issue and lend notes in New 
York City, dating them at some remote place in the interior. 

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and then redeem them at a discount of J per cent at the 
very place where he had issued them. The profit on $10,000 
would be $50 each time that amount of notes was put 
I out and taken back, plus the interest paid 

1 Banwie* ^** ^^ ^^^ borrower. This was more freedom in 
) banking than had been contemplated. An 

act was accordingly passed in 1844, providing that nobody 
should transact business as a banker except at the place of 
his actual residence, but this law was evaded. The banker 
appointed a dummy in the interior town to sign the notes 
for him, and then went on as before. Banks established 
merely for the purpose of issuing notes were made the sub- 
ject of examination and reproof by a committee of the senate 
in 1845. Three years later a law was passed requiring that 
all banking associations and individual bankers should be 
banks of deposit and discount as well as of circulation ; but, 
as there was no means provided for enforcing it, this law 
was evaded also. In 185 1 the legal discount on country 
bank notes was reduced to J per cent. 

It was commonly supposed that security for bank notes 
was the same thing as redemption of them ; and that, if the 
notes were secured, redemption would not be demanded, 
or if demanded would be easily met. All of these supposi- 
tions were erroneous. Redemption of the notes was just as 
necessary under this system as under any other ; and when 
the test came, the security was found to be defective. The 
event proved that there were other conditions requisite to a 
good banking system, — that the shareholders must be men 
I of substance and character, that the banks must have capital 
* and local habitations, and that they must do a real banking 
■ business. The defects of the securities under the free 
, bank system were remediable, however. Experience having 
! proved that bonds and mortgages were not quick assets 
: and that they might become utterly unavailable in a panic, 

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they were finally cast out altogether, and the stock securi- 
ties were toned up to par by being restricted to those of the 
United States and of the state of New York. The state 
constitution of 1846 also contained important 
the^^stem provisions. It made stockholders individu- 

ally liable (after a specified date) for the 
debts of banks to an amount equal to their respective 
shares, in addition to the amount invested by them in the 
bank. It provided that in case of insolvency note holders 
should be preferred creditors ; that the legislature should 
not pass any law sanctioning the suspension of specie pay- 
ments ; that no special charters for banking purposes should 
be^hereafter granted or extended ; and that all future acts of 
incorporation, whether general or special, might be altered, 
amended, or repealed. All these provisions are traceable 
tci the Locofoco uprising of 1836-37. 

From 1839 to 1850 thirty-two free banks failed, with a 
circulation of $1,468,243, which was redeemed at various 

rates from par down to thirty cents on the dol- 
System perfected. , , , , . V» « -r, 

lar, the aggregate loss being $325,487. From 

185 1 to 1 86 1 there were twenty-five failures, with a cir- 
culation of $1,648,000 and a loss of only $72,849. After 
186 1 there were no failures that resulted in loss to note 
holders, except by some small delay in realizing on the 
securities. The system was now nearly perfect, so far as 
security was concerned. 

Comparison of the results of the safety fund and of thei 
free bank systems in the state of New York shows a marked 
advantage for the former in the matter of elasticity of ; 
note issues, or the power to respond quickly to the vary- 1 
ing demands of business. It was not necessary for the 
safety fund banks to invest additional capital, to buy 
securities in the market and lodge them with the state 
comptroller, and to go through other tedious formalities 

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before meeting the demand for more notes. They could 
respond immediately, and in exact measure with the demand. 
The free banks, after buying their notes from the state comp- 
troller, could not put out any more of them 
w^e^isroes' ^^^" ^^^ safety fund banks could of theirs, 
which cost nothing, or keep them out any 
. longer. When the notes of the free banks came back to 
I their counters they became dead capital, earning no interest. 
Hence those banks would take out no more than the aver- 
age amount which they could keep in circulation. Thus 
they would have no margin for special emergencies. 
Accordingly there was a regular rise and fall of the circu- 
lation of the safety fund banks according to the seasons 
and the state of trade, while that of the free banks was 
comparatively rigid. ^ 

The free bank system of New York harmonized so WfU 
with the doctrine of equal rights and gave such promise of 
abundance of money that it became very popular. Sixteen 
states adopted it in whole or in part. The controlling motive 
in most cases was to secure circulating notes in the largest 
amount and with the greatest rapidity possible. The state 
of Illinois passed her free banking law in 185 1. In Novem- 
ber of that year it was submitted to a vote of 
uf nii^o^s^* the people and ratified. It provided that any 

number of persons might organize a bank, but 
that no bank should have a less capital than $50,000. It 
did not require that a bank should have any directors. The 
bank's capital might consist wholly of bonds of states or the 
United States, deposited with the state auditor as security 
for its circulating notes. The auditor could deliver to the 

1 Mr. L. Carroll Root, in his monograph on New York Bank Cur- 
rency^ presents a view of the working of the two systems as regards 
elasticity, by charts showing the rise and fall of the circulation under 
each from 1857 to 1861. — Sound Currency, Vol. II, No. 5. 

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bank in circulating notes 80 per cent of the market value of 
the securities. The banks were allowed to pay out the notes 
of any specie-paying banks of the United States or of 
Canada. This was virtually an authorization to banks to 
pay their debts in something else than gold or silver and 
hence was unconstitutional ; but, as it was in accord with 
public opinion, nobody questioned it. One hundred and 
twenty banks were established under this law. Most of them 
were banks of circulation only. The banking business, in 
their view, consisted in converting state bonds into circulat- 
ing notes, getting these into the hands of the people for 
value, and preventing note holders from calling on them for 
specie. There were attempts at first to do a legitimate 
banking business in the large towns under this law ; but they 
were ineffectual, because the notes of such banks would be 
returned for redemption, while those of remote and inacces- 
sible places would remain in circulation. In practice it was 
hardly necessary for the bank to have a place of business, if 
its notes were secured. In some instances, where attempts 
were made in Illinois to present notes for redemption at the 
bank's counter, no counter was found, but merely a hired 
room in some place remote from any railway station and 
situated on some bottomless prairie road. 

The panic of 1857 caused a suspension of specie pay- 
ments over the greater part of the country, including New 
York and New England. With such illustrious examples 
before them, the closing of the banks of Illinois was looked 
upon as a matter of course. Exchange on New York rose to 
1 5 per cent premium in Chicago. The country banks of Illi- 
nois had nothing except security bonds which were held by 
the state auditor. In many cases the bonds had been bor- 
rowed and the resulting notes had been handed over to the 
lenders. Nevertheless, the people were tolerant and allowed 
the bankers time to recuperate. In 186 1, when the Civil War 

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began, there were 112 so-called "solvent banks" in exist- 
ence in the state, meaning those that had recovered from 
the disasters of 1857 or had been established later. When 
the clouds of the war began to lower, the security bonds, 
many of which were those of Southern states, began to 
decline in value, and the notes depreciated accordingly. 
There was now no real money and no currency in Illinois, 
but merely different varieties of uncurrent notes passing 
at various rates of discount, the quotations varying from 
day to day, from place to place, and even from street to 
street. Lists of banks, with the rates at which their notes 
would be received in trade, were posted in all shops, railroad 

offices, and brokers' offices, and published in 
Final Collapse. . _. , , ,. 

the newspapers. There was a merchants list, 

a bankers' list, and a railroad list, and these were subject 
to change without notice. In August, 1861, the system col- 
lapsed. At the end of the year only seven free banks 
remained, with a total circulation of $147,000. The legisla- 
ture was bewildered by the crumbling of the system on whose 
security such extravagant hopes had been built. A law was 
enacted providing that no bank should have a circulation 
exceeding three times its capital, and that the bonds depos- 
ited to secure its circulation should not be considered as 
evidence of capital ; but the system never recovered from the 
shock. The circulation outstanding at the beginning of 1861 
was $12,320,694. The average loss to note holders was 40 
per cent. But for the advent of the Civil War it is probable 
that free banking in Illinois would have followed the same 
course as in New York, — that the securities would have 
been gradually toned up to par, the laws made more stringent, 
and central redemption required. 

The free bank system was adopted in Indiana in 1852 
and in Wisconsin in 1853. The law of the former state was 
very similar to that of Illinois. The differences were that 

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in Indiana the auditor might issue circulating notes to the 

full amount (instead of 80 per cent) of the face value of the 

securities deposited, and that each bank must 

have specie in its own vaults equal to 12^ per 

cent of its circulating notes, — a requirement that was not 

generally complied with. The downfall of the system in| 

Indiana was even more precipitate and disastrous than in| 


The free banking law of Wisconsin allowed the bank 

comptroller to issue circulating notes to the full amount of 

the bonds of states deposited with him by banks. It allowed 

him also to receive the first mortgage bonds of any railroad 

in the state twenty miles long, or divisional mortgage bonds 

on sections of road of not less than forty miles, such road to 

be first inspected as to its physical condition 

by the governor, the Attorney-General, and the 

bank comptroller, or any two of them. On such securities 
80 per cent of circulating notes could be issued, and 
one-half of the securities of any bank might consist of rail- 
road bonds of this description. Stockholders were required 
to give their personal bonds to the extent of one-fourth of the 
amount of the circulating notes, as security against deprecia- 
tion of the other securities. Except in this particular the 
shareholders were not liable beyond the amount of their 
capital invested. This law was no better than those of 
Illinois and Indiana, but it was better administered. The 
comptroller was more careful about the securities he took, 
and as a consequence the banks were better fortified when 
the strain came. Yet they ended in disaster and disorder, 
the city of Milwaukee being the scene of riots in June, 1861, 
in consequence of the depreciated currency. 

The free bank system was adopted permissively in Canada 
in 1850. There it was brought in competition with the sys- 
tem of chartered banks, which was then substantially the 

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same as that of the New England States. Only six banks 
were organized under it, although special advantages were 
offered in the way of exemption from taxation. Their cir- 
culation, which reached $1,080,684 in 1856, ran down to 

$495,631 in i860, and the next year three of 
^^aaada*^*^ the six practically withdrew from the field, and 

now only one remains. The reason for the 
failure of the system was that the free banks could not com- 
pete with their neighbors and rivals in business. When the 
system was started, the Canadian government debentures 
paid 6 per cent interest and could be bought at a price which 
netted 7 per cent to the investor. The advocates of the sys- 
tem said that this would furnish an ample margin of profit, 
— that the banks would get 7 per cent on their deposited 
bonds, plus whatever they could obtain from the loan of their 
circulating notes. This was a half truth. The fact was 
overlooked that the other banks, having their capital free 
(not locked up in government debentures), could lend three 
or four dollars of credit for every dollar of cash in hand and 
could use their circulating notes as well as the free banks 
could use theirs. Thus the business opportunities were in 
favor of the chartered banks. A similar competition, with 
similar results, took place between free, or bond-deposit, 
banks and chartered banks in Massachusetts, Ohio, and 
Louisiana. The former were crowded out. 


Until the year 48^ nobody could engage in the business 
of banking in the state of New York without a special 
charter. Thus had grown up a bank monopoly which had 
been the cause of political corruption and bribery of the legis- 
lature. These abuses led to a popular reaction and to the 
passage of a law enabling any person, or association of 

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persons, to engage in the business of banking on condition - 
of securing their circulating notes by the pledge of public^ 
stocks, or of such stocks and bonds and mortgages together, 
to be lodged in the hands of the comptroller of the state. 
In case of the failure of any bank the comptroller was 
required to sell the securities and apply the proceeds to the 
redemption of the notes. 

The first bank failure under this system took place in 1840. 
Its securities realized only sixty-eight cents on the dollar of 
its outstanding notes. . Twenty-six free banks failed between 
the years 1839 and 1844, and their notes were redeemed at 
the average rate of only seventy-six cents on the dollar. 
These results proved, not that the system was bad, but that\ 
it was defective in details. Then the law was amended, so' 
that only the stocks of the United States and of the state of 
New York should be accepted as security for the note issues 
of the free banks, while bonds and mortgages were excluded 
altogether. After these amendments had been made the notes 
of banks which became insolvent were redeemed at par. 

In several of the states which followed the example of 
New York the free bank system proved a disastrous failure, 
in consequence of the badness of the securities authorized 
to be taken. Before these states had time to perfect the 
system the Civil War began and the national bank act soon 
afterward superseded all other systems. 

Authorities for Chapters X and XI 

Knox's History of Banking in the United States, 

Root's New York Bank Currency {Sound Currency^ Vol. II, 

No. 5). 

Hammond's History of Political Parties in the State of New 


Breckenridge's Canadian Banking System, 
Reports of the Bank Comptroller of New York. 

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The orderly conditions of banking at the beginning of the 
twentieth century cannot be fully appreciated without a glance 
at the chaos which prevailed during the greater part of the 
nineteenth. Some of the disorders have been detailed in pre- 
ceding chapters, but they give a very inadequate idea of the 
miseries endured by the people before the second Bank of 
the United States was established and for some thirty years 
after it ceased to exist. 

The usual method of starting a bank was as follows : First, 
a charter was obtained from the state legislature. This 
would form the basis of a speculation. It was customary to 
subscribe for a much larger number of shares than one 

expected to get. One bank is said to have had 
BaTkChartera ^^ authorized capital of $100,000, whereas the 

subscriptions amounted to $8,000,000. In 
Philadelphia the struggle at the windows of the offices where 
subscriptions were taken was often attended with severe 
personal injury. " The most disgraceful riots that occur in 
Philadelphia, '* says Gouge, " are those which are produced 
by the opening of the books of subscription for a new 
bank." If the competition had been very brisk, the shares 
would generally command a premium after the books were 
(closed. This was the chief aim of the speculators. Then 
!the capital would be paid mostly i^ stock no^^s. The inter- 
est on the stock notes would be offset by the dividends on 
the shares, with a surplus to the speculators, provided the 


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bank did not break. If the times happened to be unpropitious 
and a suspension of specie payments followed, the state 
legislatures were lenient, the banking fraternity was power- 
ful, and public opinion was so lifeless that the business 
might go on just as well as 'before, or even better, since 
there would then be no restraint upon the bank's issues. Asr 
the activities of banking at that time took the form of note/ 
issues rather than of deposits, the losses resulting from bank 
failures were widely diffused. They fell upon the whole 
community, but especially upon farmers, mechanics, wage- 
earners, washerwomen, and other poor people, who did not 
have bank accounts, but into whose pockets the worthless 
notes had found their way. 

There were general suspensions of specie payments in 
1814, 1818, 1837, 1841, and 1857, besides the suspension of 
the Civil War period, — 1861-79. There were some crises in 
which the banks which continued to pay specie were excep- 
tions to the general rule. There were also many partial 
suspensions, where large groups, although not a majority, 

of banks failed ; and there were individual 
Bank Failures. ... , . , 

suspensions without number, many of them 

fraudulent, and all entailing indescribable suffering on the 
poorer classes. Such misery was inflicted upon the country 
that some of the states in their constitutions entirely pro- 
hibited the existence of banks within their limits.^ Most 

1 The writings of W. M. Gouge and Condy Raguet, like the pages of 
Niles' Register y are filled with particular instances of downright fraud, 
and of reckless speculation which can hardly be distinguished from 
fraud, in the establishment, operation, and closing of banks in the first 
half oi the nineteenth century. For example : the Towanda Bank of 
Pennsylvania established its credit and gained a large circulation by 
having an agent to redeem its notes in Philadelphia. Suddenly the 
agent stopped redeeming them. " Hundreds of poor laborers," said the 
Public Ledger ^ *♦ were to be seen running in every direction with their 
hands full of the trash and not able to induce a broker to give a sixpence 

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commonly, however, the banking fraternity controlled the 
state governments. 

A report made to the legislature of North Carolina in 1828 
disclosed the following facts. The bank of Cape Fear and 
the bank of Newbern were chartered in 1804. The nominal 
capital of each was $800,000.. In each case the law required 

that this should be paid in gold or silver, but 
North Carolina ^^ ^^^ ^^^ ^^ paid. Upon this fraudulent basis 

they issued notes to the amount of more than 
$3,000,000, which they issued for discounting paper, drawing 
6 per cent interest, " so that," says the report, " for the use 
of their notes, which, intrinsically, were of no value at all, 
the stockholders of these two banks have drawn from the 
people byway of interest something like $200,000 annually." 
The state bank of North Carolina was incorporated in 181 o 
with a capital of $1,600,000. In 18 19 these three banks 
entered into an agreement with each other not to pay specie, 
and their circulating notes immediately fell to 15 per cent 
discount. They then introduced a clause into the promissory 
notes which they discounted, requiring payment in specie ; 
that is, they lent their own irredeemable notes to the public 
on condition that payment should be made in coin. The 
specie so received was used to buy up their own circulating 
notes at a discount. At the time when the investigation was 
made the state bank had less than $1000 specie in its vaults. 
In view of these shocking revelations the recommendation 
of the legislative committee was that the Attorney-General 
should be directed to institute proceedings for forfeiture of 
charter. Even that suggestion failed ; for, when the banks 

on the dollar for them. We passed in the market a woman who makes 
her living by selling butter, eggs, and vegetables, who had almost all 
she was worth, about $17, in Towanda bank notes. When apprized 
that it was worthless, she sank down in agony upon her stool and wept 
like a child." 

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threatened to call in their loans, the legislature immediately 
became deaf and the people dumb. 

The state of Georgia in 18 18 gave to the bank of Darien a 
charter, which provided that in every case where a demand 
was made on the bank for the redemption of its notes in 
specie the cashier might require the person 
making the demand to take an oath in writing 
" that such notes or bills so presented for payment are not 
the property of any other bank, company, or incorporation." 
The bank enlarged this privilege by adopting a rule that 
every person presenting its notes for .redemption must take 
ai) oath in the bank, before a justice of the peace and in the 
presence of five directors and the cashier, that he was the 
owner of the notes and was not acting as the agent of anybody 
else. Of course, if it was very inconvenient for the bank to 
pay, it could thus protect itself ; for it would be very diffi- 
cult for the other party to bring a justice of the peace, five 1 
directors, and the cashier together. In other words, the bank! 
assumed power to suspend and resume payments at its own 
pleasure. ' 

The exercise of this power as against strangers was favored 
by public opinion, not only in Georgia, but throughout the 
South and West. . Anybody coming from a distance to draw 
specie from a bank incurred the odium of the community. 
In such cases the bank was considered justified in paying 
the most inconvenient kind of coin and in taking the longest 
time to count it. In some cases persons who claimed their 
rights against banks in this way were threatened with tar 
and feathers. Public authority over banks was equally 

1 " We search almost in vain through the law reports for any decisions 
on the rights or authority of the state over banks, or the duties of banks 
to the state. It may be said that no attempts were made to test or 
enforce the rights of the state against banks and that, as a matter of 

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A number of chartered banks existed in Michigan in 1837. 
Early in that year she passed a banking law which, in some 
I of its features, anticipated the free bank act of New York. 
It provided that any number of freeholders, not less than 
twelve, might organize themselves as a bank 
and open books of subscription to the capital 
stock thereof, 10 per cent to be paid in specie at the time 
of subscribing, and not less than 30 per cent before com- 
mencing business. The banks were required also to deposit 
security with the auditor-general of the state for their circu- 
lating notes and other liabilities. The securities might be 
bonds and mortgages or the personal bonds of resident 
freeholders, to be approved by the treasurer and clerk of the 
county, and they were to be held for the debts of the banks 
in case the other assets should prove inadequate. In the 
following December another act was passed providing for 
the appointment of three co mmi ss ione rs to visit and inspect 
all the banks every three months and especially to examine 
their specie. This act also made a change in the system of 
deposited securities, by providing that they should consist 
of bonds and mortgages only. 

The commissioners started on their journey in January, 
1838. They found that the state had. been plentifully 
littered with banks, but that the basis for most of them was 
one lot of specie, which was used in each case until the 
formalities of the law were complied with and then passed 
on to the next. In other cases no specie Had been seen at 
any time, but incantations had been held with imaginary 

practice, it had none. The banks were almost irresponsible. Such 
decisions as bear at all on the authority of the state over banks proceed 
from the attempts of the banks to resist the exercise of any authority 
whatever. For instance, the banks which had charters resisted the 
appointment of Bank Commissioners, which was an exercise of visitorial 
power, and was the lever by which the state, after 1840, began to reduce 
the banks to order." — Sumner's Bankings p. 352. 

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gold in the form of specie certificates and specie checks. 
The commissioners learned that a watch was kept on their 
movements and that when they were expected to visit a cer- 
tain bank the requisite amount of specie would be sent ahead 
one day or one night, so that it might be inspected and then 
withdrawn for the use of the next bank. But, as the specie 
in circulation at that time was mostly of foreign origin, after 
a particular lot had been inspected two or three times it could 
be identified by the preponderance of coins of this or that 
country, or by special marks on some of them. In this way 
the commissioners easily discovered the deception. Yet in 
every case somebody was found to swear that the specie 
belonged to the bank and that it was intended to be kept 
there for the sole business of that bank. Many of these 
institutions were located in the depths of forests where there 
were few human habitations, but plenty of wild cats. Thus 
they came to be known as the "wild-cat banks.*' Forty of 
these so-called banks went into operation 

"Wild-Cat under the law of 1837, with a nominal capital 

Banks. ' * 

of $3,900,000, and all but four of them failed 

before December, 1839. The failure of the free banks 
discredited the chartered banks also and brought all of them 
down except three. The people of the state, who did not then . 
number above 100,000 and were very poor, were left with 
$1,000,000 of worthless bank notes in their hands, for which 
they had given their products and their labor. When an . 
attempt was made to realize on the mortgage securities, the 
Supreme Court pronounced the free banking act unconsti- 
tutional and void.^ 

The bewildering state of the paper currency before the 
Civil War may be learned from the numerous bank-note 
Reporters and counterfeit detectors of the period. It was 
the aim of these publications to give early information to 

1 Felch*s Early Banks and Banking in Michigan, 

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enable the public to avoid spurious and worthless notes in 
circulation. These were of various kinds : (i) ordinary 
counterfeits ; (2) genuine notes altered from lower denomi- 
nations to higher ones; (3) genuine notes of 

Su?Note"^ ^^^^^^ ^^^^^ ^^^^^^^ ^^ ^^ ^^^^^ ^^ solvent 
banks ; (4) genuine notes of solvent banks 
with forged signatures ; (5) spurious notes, such as those of 
banks that had no existence; (6) spurious notes of good 
banks, as 20's of a bank that never issued 20's ; (7) notes of 
old, closed banks still in circulation. 

The number of counterfeit and spurious notes was quite 
appalling, and disputes between payer and payee as to the 
goodness of notes were of frequent occurrence, ranging over 
the whole gamut of doubts, — as to whether the issuing bank 
was sound or unsound, whether the note was genuine or 
counterfeit, and, if sound and genuine, whether the discount 
was within reasonable limits. All merchants kept "bank-note 
Reporters " for ready reference. If there was a bank in the 
town, the cashier was appealed to constantly by citizens to 
pass upon the goodness of notes in circulation. 

BicknalVs Counterfeit Detector and Bank-Note List of 
January i, 1839, contained the names of fifty-four banks 
that had failed at different times ; of twenty 
Detectorr* fictitious banks, the pretended notes of which 

were in circulation ; of forty-three other banks, 
for the notes of which there was no sale ; of two hundred 
and fifty-four banks, the notes of which had been counter- 
feited or altered ; and enumerated thirteen hundred and 
ninety-five descriptions of counterfeited or altered notes then 
supposed to be in circulation, of denominations from one 
dollar to five hundred. 

Twenty years later Nicholas' Bank-Note Reporter had fifty- 
four hundred separate descriptions of counterfeit, altered, and 
spurious notes. The number of this Reporter for November, 

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1858, described thirty different counterfeits of the notes of 
the Bank of Delaware, Wilmington. They were one i, three 
2's, twelve s's, seven lo's, four 20's, two 50's, and one 100. 
The known counterfeits of the Bank of Kentucky, Louisville, 
were three I's, two 2*s, two 3's, one 4, two 5's, four lo's, 
seven 20's, four 50's, two loo's, and one 500, — twenty-eight 
in all. The same number were catalogued of the State Bank 
of Ohio, namely, four i^'s, five 2's, two 3's, four 5's, nine 
io*s, two 2o's, one 50, and one 100, with the remark appended 
to the last : " Bank never issued any." Descriptions of the 
latest counterfeits were inserted conspicuously on the first 
page of each number. Thus the first page of Thompson's 
Reporter for June 11, 1857, had warnings against fourteen 
spurious and altered notes which had made their appear- 
ance since its last issue. Extra sheets of the same publica- 
tion in 1859 had notices like the following : 

I's, 2's, 3*5 and 5's of the Wisconsin Miner's Bank are in cir- 
culation ; there is no such bank. 

Notes of the broken Farmer's Bank of Rhode Island are 
appearing altered to the other Farmer's Banks in various cities and 

Counterfeiters have become possessed of a large batch of the 
worthless notes of a concern called the Thames Bank, Laurel, 
Ind., and have commenced altering them to represent bills of 
various good banks — the Thames Bank of Norwich, Conn., and 
the Conway Bank, Mass., and others. 

Bank of Mobile. Genuine impressions of the 20's, 50's and 
loo's of this bank with forged signatures are in circulation. 

There was a publication called Monroe's Descriptive List 
of Genuine Bank Notes, This contained thirteen hundred 
and twenty-three separate descriptions of notes. Frequently 
the banks which found their notes successfully counterfeited 
would destroy the plates and get new ones engraved, with 
the result that they had two or three kinds of genuine notes 

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in circulation at once, thus, of course, adding much to the 

confusion. There was also a list of broken, closed, and 

worthless banks. This was kept standing in all the Reporters. 

There were forty such credited to New York City at one 

time and one hundred and twenty-five more to other parts of 

the state. Rates of discount on all bank notes that were 

not at par in New York were quoted in all the Reporters. 

The auditor of Illinois advertised, November 9, 1861, that 

he would redeem the notes of one hundred and thirty-nine 

banks named by him, at various Yates ranging from 40 to 90 

cents per dollar. 

Among the minor abuses of banking was the practice of 

requiring borrowers to leave on deposit a certain proportion 

of the amount borrowed, — in some cases 40 per cent, — 

so that the bank could lend the difference to somebody else 

and thus get double interest. The practice of 
Minor Abuses. . . , , , • . , 

issumg post notes, payable thirty or sixty days 

after date, — this feature being, in some cases, printed in 

very small letters so that an ordinary observer would not 

notice it, — has been previously referred to. Laws were 

enacted forbidding the issue of post notes; but they were 

evaded by the device of lending notes on condition that they 

should be put in circulation at a certain distance from the 

bank, or should be kept out a certain length of time, or 

should be used only as collateral security for loans at other 

. banks. One of the most common practices was to pay out 

\ the notes of distant banks that were at a discount. This 

practice prevailed largely in Chicago and the surrounding 

country from 1854 to 1859. Most of the bankers in that city 

owned banks in the state of Georgia, the notes of which they 

paid out for the commercial paper which they discounted. 

The same banks sold drafts on New York at f per cent 

premium in exchange for these notes ; in other words, they 

paid out the notes at par and redeemed them at a discount. 

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This practice was sanctioned by law and public opinion, and 
it turned out that these unsecured notes of banks in a distant 
and then rather inaccessible state were intrinsically better 
than the bond-secured issues of the banks of Illinois. The 
former had assets without securities, and the latter had 
securities without assets. None of the Georgia-Chicago 
banks failed, nor did the discount on their notes ever exceed 
I per cent. The condition was similar to that which existed 
in New England before the corrective measures of the Suffolk 
Bank system were applied. 


* Grave disorders in banking prevailed in the United States 
during the larger part of the nineteenth century. They were 
due to the lac k of public regulatio n, to t he wan t of any 
uniform system applicable to all parts of the country, and to 
the significant fact that public opinio n was both torpid and 
unintelligen t. The first and second Banks of the United 
States had been overthrown and nothing had been substi- 
tuted which could be applied to the entire nation. Their 
place was filled by multifarious banks, under heterogeneous 
special charters and systems, of which sharpers took advan- 
tage to plunder the unwary. The lack of public regulation 
led to innumerable frauds and miscalculations. Want of 
uniformity opened the door to thousands of counterfeit and 
spurious notes, by means of which many people lost their 

An active and intelligent public opinion is indispensable 
to keep banks, as well as other institutions, in good order ; 
and for this there is no possible substitute. It is not suffi- 
cient that the banking laws be good. They must, above all, 
be promptly and inexorably enforced, and this cannot happen 
unless public opinion is well instructed and alert. 

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Gouge's Short History of Banking and Paper Money in the 
United States, 

Raguet's Treatise on Currency and Banking, 

Raguet's Financial Register. 

Niles' Weekly Register, 1811-1848. 

Felch's Early Banks and Banking in Michigan, 

Kinley's Independent Treasury, 

The Banker's Magazine and Statistical Register^ 1846 et seq. 

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Notwithstanding the disorders of banking in the West 
and South described in the preceding chapter, there were 

some bright spots in the prevailing gloom. 
^todSaa^ The most notable of these was supplied by 

the State Bank of Indiana. This was a sys- 
tem, or group, of banks modeled, for the most part, upon the 
Bank of the United States. It was established by the state 
legislature in 1834, after the bill to recharter the Bank of 
the United States had been vetoed by President Jackson. 
The capital of the bank was $1,600,000, all of which was 
paid in specie ->— mostly in Spanish and Mexican silver 
dollars. One-half of the capital was owned by the state 
and the other half by private individuals; but the state 
advanced 62^ per cent of the private subscriptions as a loan 
at 6 per cent interest, taking mortgage security and a lien 
on the shares for repayment. The persons subscribing for 
shares were required to pay 37^ per cent of their subscrip- 
tions in specie before the state advanced the remainder. 
The state procured the money by a 5 per cent loan nego- 
tiated in New York. The securities issued were termed 
" bank bonds." These were to run a little longer than the 
charter of the bank and were specially secured by the state's 
shares in the bank and her lien on those of the private 
shareholders. The charter was to continue twenty-five years, 
and no other banking corporation was to be created or 
permitted in the state during that time. 


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The bank was to consist of one parent institution at 
Indianapolis and ten branches. Each branch had a capital 
of $160,000. The parent institution had no capital under 
its immediate control, differing in this respect from the Bank 

of the United States. It consisted of a presi- 
system*^** dent and board of directors who supervised, 

examined, and controlled the whole. The 
president and four directors were chosen by the legislature 
to hold office five years, and one director was chosen by the 
private shareholders of each branch. The branches were 
managed by the local shareholders, subject to the central 
board at Indianapolis. The number of branches was after- 
wards increased to thirteen by additional capital, of which 
the state contributed one-half. The earnings of each branch 
belonged to its own shareholders exclusively, but the divi- 
dends were declared only by the parent bank. Unpaid 
interest on loans, whether due or not due, could not be 
included in dividends. Each branch was liable for the 
debts of every other branch, and in case of the insolvency 
of a branch had to pay them within one year; but the state 
had a first lien on the assets of any failed branch for the 
reimbursement of its stock. The branches were independent 
of each other as to assets, but were united as to liabilities^ 
This had the effect of inducing vigilance on the part of all 
the members in watching each other and of inspiring public 
confidence in the stability of the whole institution. 

No branch could lend money on the security of its own 
stock. No officers or directors could borrow on terms unlike 

those offered to the public, or indorse for 
Regulations ^^^^ Other, or vote on questions wherein they 

were financially interested. On all applica- 
tions for loans above $500, a majority vote of five-sevenths 
of the board was necessary, and this was to be entered on the 
minutes with the names of the directors so voting. Directors 

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were individually liable for losses resulting from infraction 
of the law, unless they had voted against such infraction. 
The insolvency of any branch was to be deemed fraudulent 
unless the contrary were proved. In any case of insolvency 
adjudged to be fraudulent the directors were to be liable 
for the debts without limit ; and after their estates were 
exhausted the other stockholders were to be liable for an 
amount equal to their shares, in addition to the amount that 
had been paid, or ought to have been paid, thereon.^ The 
debts due to or from any branch (except for deposits) were 
not to be more than double the capital of that branch. Theo- 
retically, therefore, each branch might have notes outstand- 
ing to doTible the amount of its capital. Its 
Notes**^'*^ maximum circulation was $4,000,000 (in 185 1), 

the capital being then $2,000,000. The notes 
were signed by the president of the bank and were issued to 
the branches by the parent bank. Each branch was required 
to redeem its own notes in specie on demand and to receive 
the notes of all the other branches at par. The notes were 
usually taken from the parent bank by the presidents or 
directors of the branches traveling on horseback. Mr. Hugh 
McCulloch (afterwards Secretary of the Treasury) was presi- 
dent of the Fort Wayne branch. He says : 

Fort Wayne was three good days' ride from Indianapolis, 
mostly through the woods. For fifteen years I made this journey 
on horseback and alone with thousands of dollars in my saddle 
bags, without the slightest fear of being robbed. I was well 
known upon the road and it was well known that I had money 
with me and a good deal of it, and yet I rode unharmed through 

^ The clause of our national bank act which makes the share- 
holders 'personally liable for all the debts of a bank to an amount equal 
to the par value of their shares, in addition to the amount invested by 
them in the bank, made its first appearance on this continent in the 
charter of the Gore Bank of Hamilton, Canada, in 1835. The provision 
in the charter of the State Bank of Indiana fell somewhat short of that. 

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the woods and stopped for the night at the taverns and cabins on 
the way, in perfect safety.^ 

Such were the leading features of this renowned bank. Its 
success was due to the excellence of the rules adopted for 

its government and to the sagacity and fidelity 
Exa^nation ' ^^ ^^^ management. It was always under the 

control of men of prudence and probity. The 
managers of the parent bank were empowered to examine the 
branches as often as they saw fit and were required to do so at 
least twice each year. The examinations were usually made 
by thQ president. They were always thorough ; and, as no 
notice was given of the time when the examiner would come, 
no special preparations could be made. Mr. McCuUoch 
ascribed the success of the bank largely to the intelligence, 
thoroughness, and frequency of the examinations. 

The bank's charter expired in 1859, and it went into 
liquidation. The state of Indiana realized a net profit 

oi $3,500,000 — over and above the interest 
Liauidation P^^^ ^" ^® bank bonds — from the bank 

during the twenty-five years of its existence. 
The private shareholders, on the average, received $153.70 
for each $100 paid in, besides the annual dividends. While 
the process of liquidation was going on, a bill was passed by 
the legislature to incorporate the Bank of the State of 
Indiana. This act was procured by certain scheming politi- 
cians, for the purpose of selling their rights under it to the 
owners of the expiring bank. In this they were successful. 
The old bank stepped into the new charter and entered 
upon a fresh career of prosperity, under the presidency of 
Mr. McCulloch ; but the state had no share in it. It con- 
tinued until 1865, when the federal tax of 10 per cent on 
the notes of state banks crippled its operations. 

1 McCulloch 's Men and Measures of Half a Century, 

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Considered as a continuous institution from 1834 to 1866, 
this was a memorable bank, of whose history the country 
may well be proud. It was another excellent illustration of 
the " banking principle." ^ Its loans and discounts took the 
form of note issues, rather than of deposits, in the proportion 
of about seven of the former to one of the latter. This was 
due to the nature of its environment, as it was situated in a 
sparsely settled agricultural country, where bank checks 
were not adapted to the conditions of society. For a circu- 
lating medium bank notes were better adapted to the wants 
of the people than specie. Such a medium was supplied by 
the bank at all seasons of the year and in exact proportion 
to the demand — that is, in proportion to the offering of good 
paper for discount.^ After 1842 the notes of the bank were 
always redeemed in specie, even during the 

Crisis of 1857. . . r « , ,t , t t • -vx 

crisis of 1857, when all the banks in New 
England, and all in New York except one (the Chemical), 
were obliged to close their doors. It is true that public 
opinion in the West did not then require the payment of 
deposits in specie. If a bank redeemed its notes in coin, it 
might pay its depositors the same kind of currency that it 

1 See page 321. 

^ " It is of course true that for more than thirty years the entire ten- 
dency of banking movements in the United States was toward making 
the notes a preferred claim against the assets, and moreover against 
a certain portion of the assets, set apart in a particular form for the 
purpose of securing the notes. It goes without saying that the national 
banking system, the culmination of that movement, furnishes the country 
with the most reliable banknote circulation it has ever had. No one, 
of course, would think of returning to the chaos that prevailed when 
each State had its own system. Yet it is by no means certain that the* 
national banking system can be made permanent on the present basis 
of bond security. If, then, it becomes necessary to reorganize the sys- 
tem, it will be worth while to examine the merits of this Indiana sys- 
tem of federal banks." — Harding's Essay on the State Bank of 
Indiana, Sound Currency^ Vol. V, No. 16. 

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habitually received from them ; but the deposits of the 

State Bank of Indiana were so small a part of its liabilities 

that it could have met that test also. 

When the bank began its operations in 1834, the state 

had about one million inhabitants; and of these less than 

one thousand were engaged in mercantile pursuits, and a 

still smaller number in manufactures. Accordingly^ the 

demands upon the bank were chiefly for 
Mortgage Loans. 

mortgage loans. Such loans were made in 

considerable amounts, and they proved embarrassing. When 
the troubles of 1837 came the bank could not realize on its 
mortgage securities. Its officers thus learned by their own 
experience that loans on land security, although generally 
safe in the long run, were not suitable for a bank whose 
liabilities were payable on demand. It accordingly discon- 
tinued them as soon as practicable. It continued, however, 
to lend money largely to farmers and drovers on personal 
security and on bills of exchange drawn against shipments 
of agricultural products. Here it found its true source of 
wealth, and here the agriculturists found an ever present 
help in time of need, in the harvesting and disposing of 
their crops. 

About the time that the State Bank of Indiana was started 
a Scottish youth named George Smith, twenty-five years of 

age, found his way to this country. A native 
George Smith. ^ 

of Aberdeenshire, he came hither to seek his 

fortune, and he found it in due time. He arrived at Chicago 

in 1834 and invested his small means in the purchase of 

real estate there. Then he returned to Scotland, where 

he persuaded certain friends, among whom was Alexander 

Mitchell, to join him in the northwestern part of the United 

States. In 1838 Smith conceived the idea of establishing 

a bank. This, however, was not easy, for the western states 

and territories were at that time intensely prejudiced against 

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banks. Smith knew that he could not obtain a charter 

directly, but thought that he might do so covertly. The 

legislature of Illinois had recently granted a charter for 

an institution called the Chicago Marine and 

The Wisconsin pirg Insurance Company. Smith took a copy 
Bfanne and Fire r , . , ^ J trj 

Insurance Co. oi this mstrument to Wisconsin and prevailed 

upon the territorial legislature to pass a similar 
one, which became law on February 28, 1839. This was a 
charter for a joint stock company to transact the business 
of marine, fire, and life insurance. It excluded "banking 
privileges " in express terms from the powers of the corpora- 
tors, but it authorized them to receive money on deposit and 
to loan the same on satisfactory security. As the phrase 
"banking privileges" meant the right to issue circulating 
notes, this was prohibited. Nevertheless, Smith and his 
associates began to issue certificates of deposit, in the 
similitude of bank notes, payable to bearer. These certifi- 
cates were in denominations of $1.00, $3.00, $5.00, and $10, 
and were generally known as " George Smithes money." 
They were at first redeemed in specie at Milwaukee ; but 
as the business grew. Smith established agencies at Chicago, 
Detroit, Buffalo, Galena, and St. Louis, where New York 
drafts were given for them at the current rate of exchange. 
The paid-up capital of the company was $225,000, all of 
which came from Scotland. 

As the legislature had never intended to grant a charter 
for a bank, it had enacted no regulations for one. Smith 

and Mitchell were therefore " wild catting " in 
s^presTsmith ^^^ ^osi barefaced manner and the legislature 

was obliged to take notice of this fact. At the 
session of 1843 ^ committee was appointed to investigate the 
company. Its finances were found to be in a sound con- 
dition ; yet, since it had issued certificates of deposit in a 
form not contemplated by law, the committee recommended 

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that the charter be repealed. This recommendation was not 
adopted then, but three years later the legislature did repeal 
the charter by a decisive vote. The company contended 
that the question of a forfeiture of its rights must be deter- 
mined judicially, and it published a notice that in the mean- 
time it would continue its business and redeem its certificates 
in the usual manner at the head office and at the established 
agencies. The legislature took no further steps, being 
restrained perhaps by the belief that, although the business 
transacted by the company was irregular, it was beneficial to 
the infant community and that a sudden termination of it 
might prove disastrous. So the Wisconsin Marine and Fire 
Insurance Company's bank continued to exist. Its circula- 
tion under the charter of 1839 reached the sum of $1,470,- 
235. There were repeated runs on it for specie, but they 
were always successfully met.^ 

This institution supplies a fresh illustration of the "bank- 
ing principle." Smith discounted the promissory note of 
Mr. A, a wheat buyer, for say $10,000, by writing that sum, 
minus the interest for ninety days, opposite A*s name in the 

bank's ledger and making a corresponding 
MoneyT'^"^*^' entry in A's pass book. That became A's 

deposit and the bank's liability. The act of 
writing was ipso facto the issuance of the bank's credit. It 
was immaterial whether A exercised his right by drawing 
his checks and handing them to various people or by taking 
the whole amount in circulating notes, but he took notes 

1" During this fruitful period (1850 to i860) of immigration, settle- 
ment, rapid growth and marvelous development of the resources of this 
great commonwealth, the Wisconsin Marine and Fire Insurance Com- 
pany was able, in spite of a dubious charter and hostile legislation, to 
supply all the channels of money circulation in the Northwest and in the 
valley of the Mississippi, with a constantly increasing stream of currency, 
the integrity of which remained to the last absolutely unquestioned." 
-^ Hadden's History of State Banks of Wisconsin. 

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because the people from whom he bought wheat could not use 
bank checks. He disbursed them among farmers, who paid 
them to country storekeepers, to farm laborers, teamsters, 
school teachers, clergymen, doctors, etc. By and by they 
reached the hands of the city merchant, who wished to make 
remittances to New York or Boston. He took the notes to 
Smith and obtained drafts on those cities at the current rate 
of exchange. It was no advantage for him to draw gold for 
the notes, because he could not send it to the East as cheaply 
as he could buy Smith's drafts. The wheat buyer, mean- 
while, had shipped his grain to a consignee in New York, 
taking a bill of lading from a steamboat. He had made a 
draft on the consignee, had attached the bill of lading to it, 
and sold it to Smith, thus paying his indebtedness to the 
bank and having something left over for his own profit. 
This draft had enabled Smith to have funds in New York 
to pay the drafts which he sold to the merchants. 

The farmers would have received gold for their wheat, if 
they had not taken Smith's notes ; but they would have been 
obliged to wait till the wheat could be sent to the eastern 
market and the proceeds returned, or else to secure advances 
of money from somebody who would wait for repayment till 
the crop had been sold. Thus, while Smith's profits were 
large, he did not alone reap the advantages of a paper medium 
of exchange, which was sound in fact, although unsound in 
principle. It was sound in fact because Smith and Mitchell 
were good bankers. It was unsound in principle because it 
was not accompanied by safeguards to protect the community 
against the doings of less honorable and less prudent men. 

" George Smith's money " was an elastic currency. There 
was no limit to his issues, except his ability to redeem them, 
of which he was the sole judge. Within this limit he dis- 
counted all the paper that he considered good. He gave his 
own paper payable on demand for that of merchants payable 

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at a fixed time. His own paper passed from hand to hand 

and might stay out a whole year. In the fall, when the crops 

began to move, there was no lack of money for legitimate 

trade, because it was as easy to put out these 

J^SJl* f^^^^ certificates at one time as at another. In the 

winter, when lake navigation was closed, the 
certificates answered all the purposes of a local circulating 
medium. In the spring, when steamboats began to move on 
the Great Lakes, bringing new settlers and cargoes of goods, 
the certificates came back, to headquarters mainly for the 
purchase of New York drafts, after which they took their 
usual round again. 

In 1853 the state of Wisconsin passed a law requiring all 
banks to deposit security with the state comptroller for 

their circulating notes. As this kind of bank- 
Retirement ^"^ ^^^ "^^ ^^^*- S"^^^^» ^^ sold his interest 

in the Wisconsin Marine and Fire Insurance 
Company and established at Chicago an institution called 
the Bank of America. He then bought two banks in Georgia, 
the notes of which he paid out at the Bank of America- by 
discounting commercial paper. These notes he redeemed by 
giving drafts on New York for them at f per cent premium. 
This was a strictly legal operation and a profitable one. The 
people had confidence in Smith, and the business prospered 
until the approach of the Civil War admonished him to 
abandon his connection with Georgia. He then retired to 
his native land and, when he died in London in the year 
1900, he left one of the most colossal fortunes in the United 
Kingdom. The Wisconsin Marine and Fire Insurance Com- 
pany became a free bank under the state law of 1853, and 
is now a national bank. 

The state of Louisiana in 1842 passed a general banking 
law which was fit to be a model for other states. Its princi- 
pal features were : (i) the specie reserve was to be equal 

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to one-third of all liabilities to the public ; (2) the other 
two-thirds of the liabilities were to be represented by com- 
mercial paper having not more than ninety 

Act^f^a^^^ ^^y^ ^^ ^"" ' (3) ^^^ commercial paper to be 
paid at maturity, and if not paid, or if an 
extension were asked for, the account of the party to be 
closed and his name sent to the other banks as a delinquent ; 
(4) all banks to be examined by a board of state officers 
quarterly or oftener ; (5) bank directors to be individually 
liable for all loans or investments made in violation of the 
law, unless they could show that they had voted against the 
same, if present ;/(6) no bank to have less than fifty share- 
holders, having at least thirty shares each ; (7) any director 
going out of the state for more than thirty days, or absenting 
himself from five successive meetings of the board, to be 
deemed to have resigned and this vacancy to be filled at 
once ; (8) no bank to pay out any notes but its own ; (9) 
all banks to pay their balances to each other in specie every 
Saturday, under penalty of being immediately put in liquida- 
tion. This was the first law passed by any state requiring 
a definite percentage of specie reserve against deposits, and 
the proportion was larger than is now considered necessary. 
Under this law Louisiana became in i860 the fourth state 
of the Union in point of banking capital and the second in 
point of specie holdings. It is a matter of history that the 
Louisiana Bank Act of 1842 was strictly and intelligently 
enforced until the city of New Orleans was captured during 
the Civil War, twenty years later. 

The State Bank of Ohio (established in 1845), like the 
State Bank of Indiana, was composed of branch banks under 
a central board of control. The law of 1845 provided that 
any number of banks not less than seven, then existing or 
to be organized thereafter, might become branches of the 
State Bank of Ohio. It started with a capital of $3,300,000. 

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368 , BANKING 

Note issuing was to be proportioned to capital, in the fol- 
lowing manner : any branch might issue $200,000 of notes 
for the first $100,000 of capital, $150,000 for the second 
$100,000 of capital, and so on. In this way a bank of 
$500,000 capital might issue $650,000 of notes. Each branch 
was required to deposit with the board of control 10 per 
cent of the amount of its circulating jrotes, either in specie 
or in bonds of the state of Ohio or of the United States, as 
a safety fund for the protection of the holders of notes of all 
the branches. The board of control might invest any money 
belonging to the safety fund in the bonds of Ohio or of the 
United States, or in mortgage on real estate in the county 
where the branch was situated, worth double the amount of 
the loan, exclusive of buildings or other destructible property. 
The interest on the invested fund was paid to the branch 
making the deposit. Each branch was liable for the circu- 
lating notes, but not for the general debts, of the other 
branches. In case of the failure of any branch to redeem 
its notes, the board of control was to make an assessment 
pro rata on the other branches and reimburse them as soon 
as the assets in the safety fund could be disposed of ; and 
then the safety fund was to be reimbursed out of the assets 
of the failed branch before any other creditors were paid. 
The State Bank of Ohio had thirty-six branches and was 
highly successful. Its charter expired in 1866. 


In the State Bank of Indiana (1834-66) we observe in a 
primitive community the working of sound rules of banking 
under good administration. One-half of this bank was 
owned by the state and the other half by private citizens. 
It consisted of: (i) a president and a central board of 
directors, whose powers were those of general supervision 

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and regulation only; and (2) a number of banks in different 
parts of the state, termed branches of the state bank. The 
members of the central board had nothing to do with the 
investment of funds ; consequently they were not exposed to 
the temptation of making loans to themselves or to favorites, 
in contravention of good business principles. The capital 
and profits of each branch belonged to its own shareholders 
exclusively, but each branch was liable for the debts of every 
other branch. The branches thus had a motive for keeping a 
watch upon each other. In case of the insolvency of a branch 
by reason of fraud in the management, the directors of that 
branch were personally liable for the debts. This rule was 
prescribed in order to insure vigilance on the part of the 
directors in keeping watch upon the administrative officers. 
The central board was required to examine the affairs of each 
branch in detail, at least twice each year. These examina- 
tions were made without previous notice and with the utmost 
thoroughness, usually by the president in person. Each 
branch was allowed to have circulating notes outstanding 
equal to twice its capital ; but the notes were issued to them 
only by the central board, and, as the central board could not 
issue any notes to the public, the danger of overissues was 
practically nil. The bank was very successful ; for no branch 
ever became insolvent and it maintained specie payments 
during the financial crisis of 1857. The state of Indiana 
reaped a large pecuniary profit from it. 

The Wisconsin Marine and Fire Insurance Company was 
chartered by the territorial legislature of Wisconsin in 1839, 
at the instance of a Scotchman named George Smith, who 
became its president. Under the terms of the charter he 
established a bank, although banking privileges had been 
excluded from the powers granted to the incorporators. The 
company issued certificates of deposit in the similitude of 
bank notes, and by prudent management secured for them 

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a general credit and acceptance in all the states and terri- 
tories north and west of Indiana. The company became the 
most important financial institution in that region and for a 
long time was the only one whose notes enjoyed a general 
circulation there. The illegal character of the business 
transacted by the company attracted the attention of the 
territorial legislature, which, in 1845, repealed its charter, but 
did not direct the Attorney-General to bring suit against it 
for forfeiture. It accordingly continued its business without 
interruption and its circulation eventually reached nearly 
$1,500,000. Its notes were always redeemed in specie at its 
head office in Milwaukee and in drafts on New York, at the 
current rate of exchange, at its agencies in Chicago, St. Louis, 
Galena, Detroit and Buffalo. Notwithstanding the taint of 
illegality, its career was honorable and useful to the commu- 
nity, as well as the source of large profits to its founders. 
The Wisconsin Marine and Fire Insurance Company's Bank 
still exists at the place of its birth. 

The banks of Louisiana, established under a law of that 
state passed in 1842, were among the soundest institutions in 
the country or in the world. Their strength was due to the 
excellent rules enacted for their guidance and to the strict 
enforcement of the same by public officials, who were 
required to examine their affairs at least once every three 
months. This law was the first one enacted in America 
requiring banks to keep a cash reserve in a definite propor- 
tion to their deposits and circulation. 

The State Bank of Ohio (1845-66) was composed of a 
central board of control, similar to that of the State Bank of 
Indiana, and of branch banks (eventually thirty-six in num- 
ber), each of which was liable for the note issues, but not for 
the general debts, of all the others. Each branch was 
required to make a deposit with the board of control equal 
to 10 per cent of its circulation, either in money or in bonds 

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of the state or of the United States, as a safety fund for the 
security of the notes of all the branches. Each was entitled 
to the interest derived from its share of the safety fund. 
The State Bank of Ohio was always solvent and successful. 


Sumner's History of Banking in the United States, 
Knox's History of Banking in the United States, 
Harding's " State Bank of Indiana " {Sound Currency, Vol. V, 
No. 1 6). 

Hadden's History of State Banks of Wisconsin. 

Strong's History of Wisconsin Territory. 

The Banker^ s Magazine and Statistical Register, 1 846-66. 

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The national bank act was a product of the Civil War. 
In 1 86 1 Mr. Chase, the Secretary of the Treasury, conceived 
the plan of making the bank-note circulation of the country 
a means of enlarging the sales of government 
Sy^n^* *^* securities. In his report for that year he sug- 
gested that Congress should take control of 
the national circulation and require that it be secured by the 
deposit of government bonds in the Treasury. Among the 
advantages to be gained, he said, would be uniformity of 
style, uniformity of goodness, and a large demand for gov- 
ernment securities. Of these three merits the last was not 
the most important, although it then seemed so. Uniformity 
of the currency, in both appearance and quality, was a boon 
of inestimable value, upon which rests Mr. Chase's title to 
fame ; yet the expectation that the scheme would be a 
great financial aid to the government was the real motive 
for its adoption. In point of fact it contributed very little 
aid. The transition from the old system to the new was 
so slow that only $98,896,488 of national bank notes were 
outstanding on the 3d of April, 1865, the month in which 
General Lee's army surrendered. This was less than 
4 per cent of the money borrowed by the government for 
the war. ^ 

The first attempt to pass a national bank bill in the House 
was defeated on July 12, 1862. In the following Decem- 
ber the Secretary renewed his recommendation with great 


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earnestness, and President Lincoln repeated it in his annual 
message, notwithstanding which it was defeated again in 
January, 1863. Recourse was then had to the Senate, where 
it was passed by the close vote of 23 to 2 1. Then the House 
yielded and passed the Senate bill without amendment by 78 
votes to 64. It became a law on February 25, 1863. Mr. 
Hugh McCuUoch of Indiana, who had come to Washington to 
oppose it, became the first comptroller of the 
^'Sthe^Bm. currency under it. He suggested so many 
amendments that a complete revision of the 
act was made by Congress the following year, and passed on 
June 3, 1864. There was no discriminating tax on the notes 
of state banks in the original, or in the amended, act. In 
February, 1865, a bill imposing a tax of 10 per cent on such 
notes was passed in the House by a majority of one vote 
and in the Senate by a majority of two. It did not become 
operative, however, until August i, 1866. 

The most important features of the national bank act at 
the present time are the following : 

There is a bureau in- the Treasury Department having 

charge of all matters relating to national banks, the chief 

officer of which is the comptroller of the cur- 

rency. His term of office is five years. He 

is required to present to Congress an annual report showing 

the condition of each national bank and an abstract of the 

condition of all of them. 

Any number of persons not less than five may form an 

association for banking purposes, to continue not more than 

twenty years. After the association is formed it is within 

the discretion of the comptroller to srive it 

a certificate (which is the equivalent of a 

charter) or not. The law requires that, before granting a 

certificate, he shall satisfy himself that the persons forming 

the association are of good character, and that they have 

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paid in the amounts of money required for the legitimate 

objects contemplated by the national bank act. He may 

ascertain these facts by means of a special commission 

appointed by him for the purpose, if he chooses ; and if, for 

any reason, he declines to grant the certificate, he is not 

required to give his reasons for withholding it. 

No national bank can be organized with a capital smaller 

than $25,000, and banks of this size can be organized only 

in places of three thousand inhabitants or less. Banks with 

a capital of not less than $50,000 may be organized in 

places of not exceeding six thousand inhabitants. ' In places 

of more than six thousand and less than fifty thousand 

inhabitants there shall be no bank with a capital smaller 

than $100,000. In cities of fifty thousand 
Capital stock. . , , . , , „ , , , 

mhabitants, or more, there shall be no bank 
with a capital smaller than $200,000. The sanction of the 
Secretary of the Treasury, in addition to that of the comp- 
troller of the currency, is required for the granting of 
a certificate for a bank of less than $100,000 capital, 
because greater precautions are supposed to be needed 
in the establishment of the smaller banks than of the 
larger ones. Yet experience has not proved that the 
former are more liable to failure than the latter. At least 
50 per cent of the capital must be paid in before the bank 
can begin business, and the remainder must be paid in 
monthly instalments of not less than 10 per cent each. If 
any instalments are not so paid, the shares must be adver- 
tised and sold to other persons. If no purchaser is found 
within three weeks, the amount already paid must be for- 
feited to the association. The shares of the bank must be 
of $100 each. 

The powers of banks are limited to the discounting and 
negotiating of promissory notes, drafts, bills of exchstnge, 

and other evidences of debt ; receiving deposits ; buying' 


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and selling exchange, coin, and bullion ; loaning money on 
personal security ; ^ and issuing circulating notes. They are 

not allowed to hold real estate permanently 
Powers. , , , , "^ 

except such as may be necessary for the trans- 
action of their business. If they acquire other real estate as 
security for bad debts, they must sell it within five years. If 
a bank were allowed to hold, for indefinite periods, lands and 
buildings thus acquired, its whole capital might gradually be 
absorbed in that way, and thus, although solvent, it might 
cease to be a bank. 

Each bank, before commencing business, must deposit 
with the Treasurer of the United States a certain amount of 
registered bonds of the United States, whether it issues cir- 
culating notes or not. If the capital of the bank exceeds 
$150,000 it must deposit at least $50,000 of bonds. If the 
capital is $150,000 or less, it must deposit an amount equal 
to one-fourth of its capital. The act of 1864 required all 

banks to deposit bonds to the amount of one- 
Deposit of Bonds. ,.,-,. . t rr^i 

third of their capital. The mam purpose of 

the clause was to sell bonds in the exigency of war. After 

the exigency had passed away the clause was modified so 

that a bank of $10,00.0,000 capital is not required to deposit 

more than one of $200,600. No good reason now exists why 

1 The act of 1863 authorized banks to make loans " on real and per- 
sonal security." In the act of 1864 the words "real and" were omitted. 
It is therefore unlawful for a national bank to lend money on mortgage 
security but it may, in order to save a bad debt, take such security 
for loans previously made in good faith. The prohibition of mortgage 
loans as a feature of banking law is first found, on this side of the 
ocean, in the charter of the Bank of Montreal, dated March 17, 182 1, 
where it stands in these words as one of the powers granted : " To take 
and hold mortgages and hypotheques on real property for debts con- 
tracted to it in the ordinary course of its dealings, but on no account to 
lend on landy mortgage^ or hypothtque, nor to purchase them on any pre- 
text except as here permitted." — Breckenridge's Canadian Banking 
System^ p. 24. , 

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a bank without circulation should keep any permanent 

deposit of bonds in the Treasury. 

The business of a bank must be managed by a board of 

not less than five directors, each of whom must own not less 

than ten shares of the capital stock not 

hypothecated or pledged as security for debt 

If any director shall cease to be the owner of ten shares, he 
shall thereby cease to be a director. Vacancies in the 
board of directors shall be filled by appointment made by 
the remaining directors. 

State banks may enter the national system by conforming 
to the provisions of the national bank act, and any state 
bank having branches may continue to have the same 
branches after entering the national system. 

The shareholders of a national bank shall be held indi- 
vidually responsible for all the debts of the bank, to an 

amount equal to the par value of their shares, 
s^choiders ^" addition to the amount invested therein. 

An exception was made in favor of any bank 
"now existing under state laws having not less than 
$5,000,000 of capital actually paid in and a surplus of 20 
per cent on hand." There was only one such bank existing 
when the law was passed, — the Bank of Commerce in New 
York, — the shareholders of which are accordingly exempt 
from the double liability clause. 

Each bank shall be entitled to receive from the comp- 
troller of the currency an amount of circulating notes equal 

to the par value of the bonds deposited by it, 
Notes**^^ but not exceeding the market value thereof, 

and not exceeding its capital stock actually 
paid in. Whenever the market value of the bonds deposited 
is reduced below the amount of the circulation, ^e comp- 
troller may demand the deposit of additional b4nds,*or of 
money, equal to the deficiency. Bonds may be withdrawn 

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by banks by retiring their circulating notes or by depositing 
lawful money to an equal amount in the Treasury. Not 
more than $3,000,000 in the aggregate can be retired in one 
month, nor can the amount of bonds deposited be reduced 
below the limitations above stated. The notes are receiv- 
able at par for all dues to the United States except duties on 
imports, and are payable for all debts owing by the United 
States within the United States^ except for interest on the pub- 
lic debt and for redemption of the national currency. Every 
bank must receive the notes of every other bank at par in 
payment of any debt due to itself. No notes shall be issued 
of less denomination than $5.00, and onlyjQii§::third of the 
amount issued to any bank shall be of the denomination of 
$5.00. Each bank must redeem its circulating notes on 
demand at its own counter. It must also 
Their Redemp. j^^^^ ^^^ j^^^p ^^ deposit in the Treasury 

of the United States, in lawful money, a sum 
equal to 5 per cent of its circulation, to be held for the 
redemption of such circulation when presented in sums of 
$1000 or any multiple thereof. The cost of transportation 
and of assorting the notes must be paid by the bank issuing 
the same. All defaced and mutilated notes received at the 
Treasury shall be replaced by new ones at the expense of 
the issuing bank. 

Any bank depositing lawful money in the Treasury for 
retiring its circulation shall pay in advance for transporting 

and redeeming the same a sum equal to the 
CkcuiiSon.^' average cost of the redemption of national 

bank notes for the preceding year. At the 
expiration of the charter of any bank all of its outstanding 
notes shall be redeemed as they reach the Treasury ; and if 
the charter is renewed, new notes of different design and 
corresponding amount shall be issued to the bank. At the 
end of three years from the expiration of the old charter the 

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bank shall deposit in the Treasury lawful money sufficient 

to redeem the old circulation still outstanding. Any gain 

resulting from the loss, destruction or disappearance of 

notes shall inure to the benefit of the United States.^ No 

bank can issue post notes or any notes to circulate as 

money except as authorized by the national bank act. 

In case of default by any bank in the redemption of its 

circulating notes, the comptroller must declare the security 

bonds forfeited to the United States and 

Redemption of g[yQ notice to the holders of the notes to 

Failed Bank 

Notes. present them at the Treasury for payment, 

" and the same shall be paid as presented, in 
the lawful money of the United States." Then the comp- 
troller may in his discretion cancel the bonds to an equiva- 
lent sum, or sell at public or private sale so much or them 
as may be necessary. In case of a deficiency in the pro- 
ceeds of all the bonds to reimburse the government for the 
redemption of the notes, the United States shall have a 
paramount lien on all the assets of the bank (which includes 
the liability of shareholders), and the deficiency must be 
made good before any other debts are paid. When the 
notes are paid, they must be canceled. 

Each bank must pay to the Treasurer of the United 
States a tax of one-fourth of i per cent each half year on 

the average amount of its notes in circulation 
Tjuc on Circtt- ^hen said notes are secured by the deposit of 

bonds of the United States bearing interest 
at 2 per cent per annum. When secured by bonds bearing 

1 The gain resulting to the government after the expiration of the 
first series of twenty-year charters and until November i, 1901, from the 
non-presentation of bank notes for redemption has been ;^ 2,97 5,250. 
The amount of notes outstanding during the period fluctuated between 
jS>ioo,ooo,ooo in 1865 and $340,000,000 in 1875. The rate of destruc- 
tion and loss of notes in the hands of the people may be roughly esti- 
mated at I per cent in twenty years. 

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a higher rate of interest, the tax is one-half of i per cent 
each half year. The tax does not apply to circulation, for 
the retirement of which lawful money has been deposited in 
the Treasury. 

All notes used for circulation as money other than those 
issued under these conditions by national banks are subject 
to a tax of lo per cent, to be paid by the person, firm, asso- 
ciation, corporation, state bank, town, city, or municipal 
corporation which issues or pays them out. 

Every bank in certain cities of 500,000 or more inhabit- 
ants, called reserve cities, must keep a reserve of lawful 
money equal to 25 per cent of its deposits. All other banks 
must keep a like reserve of 15 per cent, but three-fifths of 
the said 15 per cent may consist of balances on deposit in 

banks approved by the comptroller, in the 
Legal Reserve. . . * , , . . 

reserve cities. Any bank m the reserve cities 

may keep one-half of its reserve as deposits in a "central 
reserve city," />., New York, Chicago, or* St. Louis. Both 
gold certificates and silver certificates shall be counted as 
part of the reserve. The 5 per cent redemption fund on 
deposit with the Treasurer of the United States shall also 
l^fi ^ounted as part of the reserve. Failure to keep the legal 
reserve is fdlowed tirst by notice from the comptroller to 
make good the reserve within thirty days. In case of fail- 
ure to do so, the comptroller may, with the concurrence of 
the Secretary of the Treasury, put the bank in liquidation. 
This clause is rather for warning than for immediate 
enforcement. No bank would be excused for stopping pay- 
ment of its deposits when it still had 25 per cent of the 
same in cash. Whether severe measures should be taken, 
in case the reserve were below the legal limit, would depend 
upon the general character of the bank and the nature of 
its assets. Banks wfien below their legal reserve are not 
allowed to increase their liabilities by making new loans or 

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discounts otherwise than by purchasing bills of exchange 
payable at sight, or to make any dividend of profits until 
their reserve has been restored. 

Banks are allowed to charge such rates of interest on 

loans as are allowed by the law of the state in which they 

are situated, and no more, but in discounting 


bills of exchange on other places they may 
charge the current rate of exchange in addition. 

One-tenth of the net profits must be carried to the surplus 
fund of each bank until the surplus is equal to 20 per cent 
of the capital. 

A bank must not lend more than one-tenth of its capital 
to one person, corporation, or firm, directly or indirectly. 
But the discount of bills of exchange drawn in good faith 
against actually existing values, and the discount of commer- 
cial or business paper actually owned by the 
Restrictions. . . , , ,, , 

person negotiatmg the same, shall not be con- 
sidered as money borrowed. A bank must not lend money 
on the security of its own shares, nor be the purchaser or 
holder of its own shares unless they are taken as security 
for a debt previously contracted in good faith, and shares 
so taken must be sold within six months. 

No bank can become indebted to an amount exceeding its 
unimpaired capital except for circulating notes, deposits, 
drafts drawn against its own funds, and dividends due to its 
own shareholders. No bank can permit any part of its cap- 
ital to be withdrawn in the form of dividends or otherwise. 
If the capital is impaired by bad debts or otherwise, the 
deficiency must be made good within three months after 
receiving a requisition from the comptroller, under penalty of 
being put in liquidation. No bank can certify a check for a 
customer for more money than he has on deposit at the time. 

Each bank must make to the comptroller not less than five 
reports each year, showing its condition at dates, already 

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past, to be designated by him, and he may call for special 

reports from any particular bank whenever he chooses to 

do so, which reports shall be published in a 
Reports. . 

newspaper in the place where the bank is 

situated, and at the expense of said bank. 

The shares of national banks are liable to taxation by 

authority of the states in which they are situated, at the 

same rates as other moneyed capital owned 
state Taxation. 

by the citizens of such states, but the shares 

of any national bank owned by non-residents of a state shdll 

be taxed in the city or town where the bank is located and 

not elsewhere. 

The comptroller of the currency, with the approval of 

the Secretary of the Treasury, shall appoint suitable persons 

to make examinations of the affairs of every 
Bank Bzaminers. 

bank and to make full and detailed reports 

thereon to the comptroller. The fees allowed by law to the 
examiners shall be paid by the banks examined. 

In case of the insolvency of a national bank the comp- 
troller of the currency may appoint a receiver, who shall take 
possession of its books, records, and assets and proceed to 
wind up its affairs and enforce the personal liability of the 

shareholders. A receiver may be appointed 

also in case the capital stock of a bank is 

reduced below the legal minimum and remains so for thirty 
days ; also for failure to make good its lawful money reserve 
within thirty days after notice ; also for purchasing or acquir- 
ing its own stock except to prevent loss upon a debt previ- 
ously contracted in good faith ; also for the false certification 
of a check. 

No bank can either give or receive national bank notes or 
United States notes, or gold certificates, or silver certificates 
as security for a loan of money, or agree for a consideration 
to withhold such notes or certificates from use. 

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It is not lawful for any person to design, engrave, or print, 
or use any handbill or advertisement in the likeness or sim- 
ilitude of the circulating notes or other obligations of any 
national bank, or intentionally mutilate, deface, or disfigure 
any such notes or obligations. 

The penalty of fine and imprisonment is imposed for 
counterfeiting bank notes or knowingly passing or attempt- 
ing to pass counterfeited notes ; also for issuing the circulat- 
ing notes of banks that have expired ; also for falsely certifying 
checks ; also for embezzling the funds of banks or putting the 
notes of a bank in circulation without authority from the direc- 
tors ; also for making a false entry in the books or reports of a 
bank with fraudulent intent, or aiding or abetting the same. 

Any national bank may be designated by the Secretary of 

the Treasury as a depository of public money, except receipts 

from customs ; ^ and when he shall deposit such money with 

them, he shall require them " to give satisfactory security by 

the deposit of United States bonds and otherwise." The 

debate in the House on the national bank act shows that 

the words " and otherwise " were intended to recognize and 

sanction a preexisting practice of the Treasury Department 

of requiring the chief officers of banks, which 
Public Deposits. 

held deposits of public money, to give their 

personal bonds in addition to the collateral security. The 

Secretary has no discretion to substitute other security for 

that of United States bonds, but he may accept anything he 

pleases in addition thereto. 

On September 30, 1901, the number of national banks 

existing was 4221.- The table on the following page shows 

their condition at that time : 

1 The distinction between customs receipts and ordinary receipts was 
made in the act of 1864, when the latter were payable in " lawful money " 
and the former in coin only. There is no valid reason for such a dis- 
tinction now, but Congress has never seen fit to change the law. 

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The national banking system was born of the financial 
exigencies of the Civil War. Its plan was outlined by 
Secretary Chase in 1861, and was recommended by him 
to Congress as a means of promoting the sale of govern- 
ment bonds, and incidentally of securing uniformity of 
design and uniformity of value in the national currency. 
The sale of government bonds was to be promoted by 
requiring that all national bank notes be secured by the 
deposit of such bonds in the Treasury. Congress did not, 
however, approve of the plan when first presented. The 
bill to carry it into effect was twice rejected by the House 
of Representatives, but was passed by both houses in Febru- 
ary, 1863, and revised and repassed in June, 1864. In 
1865 an act was passed imposing a tax of 10 per cent on . 
the notes of state banks. The intention and effect of this 
act were to compel such banks either to come into the 
national system or to cease issuing notes to circulate as 

The regulations of banking adopted in the act of 1864 
were selected from state bank systems then or previously in 
existence. Most of these regulations can be found in the 
preceding pages of this work. /rThe supreme merit of the 
national system consists in the unification of banking in all 
the states and territories. Aside from this, the only new 
ideas embodied in the law were the government's immediate 
responsibility for the note issues and the requirement that 
each bank should receive the notes of every other bank at 
par in the payment of dues to itself. The government's 
immediate responsibility for the notes, however, is merely a 
corollary of the requirement that all notes shall be secured 
by United States bonds deposited in the Treasury. 

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In order to obtain money to carry on a war in which the 
fate of the dynasty and of the Protestant religion was sup- 
posed to be involved, Parliament in 1694 passed an act 

creating a corporation for ten years, to be 
Bank of England. or- j -> 

called the Governor and Company of the 

Bank of England. On condition that the said corporation 

should lend to the government at once the sum of ;£'i,2oo,- 

000 the government was to pay 8 per cent interest, plus 

;£"4ooo per year for expenses, — a rate much less than the 

treasury had been accustomed to pay. The bank was 

empowered by its charter to deal in bills of exchange, to 

buy or sell coin and bullion, to lend money on the security 

of goods, wares, and merchandise, and to sell such goods 

if the loan was not repaid. It was not permitted to incur 

debt exceeding ;£"i,2oo,ooo or to deal in goods, wares, or 

merchandise except as above stated. 

The subscription to the capital was completed within ten 

days after the books were opened, and with the money thus 

obtained the war was brought to a successful termination. 

The scheme was well conceived ; for it established a credit 

by means of which the wealth of the commu- 

BeSn^^i nity could be mobilized for the use of the 

army. The bank advanced its capital to the 

government, but recovered it presently by issuing an equal 

amount of its own notes, which the public accepted at par 


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because they had confidence in the bank. The notes of the 
bank were to pass by indorsement, were payable at such 
times as the bank might determine, and were not legal 
tender. An amendment to the charter passed in 1697, pro- 
viding for an increase of the capital stock by ;^i,ooi,i7i, 
authorized the issue of notes to the same amount, payable 
to bearer on demand, and required that they should have a 
mark to distinguish them from the earlier issue. The first 
notes issued were post notes drawing interest. The next 
batch (those of 1697) were demand notes drawing no inter- 
est. The people accepted them at par, and the bank again 
loaned an equivalent amount of specie to the treasury. 

In 1709 Parliament granted a quasi monopoly to the bank 

by a provision that no other corporation and no private 

partnership composed of more than six persons should 

exercise the right of issuing circulating notes 

WoTislues! "^^ ^^^^ P^^^ ^^ ^^^^^ Britain called Eng- 

land." This was reenacted in 1742, with the 
added provision that the said Governor and Company of 
the Bank of England were thereby "declared to be and 
remain a corporation with the privilege of exclusive banking 
as before recited,''^ The terms used show that in common 
acceptation the word " banking " was inseparable from the 
issue of circulating notes ; and, in fact, for more than a 
hundred years everybody understood that this was a pro- 
hibition against deposit banking, as well as against note 
issues, by stock companies. 

The charter was renewed from time to time, on varying 
conditions, usually on the condition of fresh loans to the 

government or a reduction of the rate of inter- 
The Restriction. . _ , t t 

est on former ones. It passed through many 

vicissitudes, the most important of which was the suspen- 
sion of specie payments for a period of twenty-four years, 
from 1797 to 1821. This suspension of cash payments 

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is commonly called the "Bank of England Restriction," 
because the bank was restricted, first by the Privy Council, 
and afterwards by Parliament, from paying specie for its 
obligations. The suspension was not due to commercial 
causes but to thfe large subsidies advanced by the bank, and 
paid by the government to continental powers, for carrying 
on the war against revolutionary France. 

Until 1829 bank notes of the denomination of £1 were 
in common use in all parts of the United Kingdom. In 
consequence of the panic of 1825, which was attributed to 
excessive issues of bank notes, an act was passed, and is 
still in force, prohibiting the issue of notes in England 
smaller than ;^5. It did not apply to Scotland or Ireland. 
The intention and effect of this act were to saturate the 
currency with a larger infusion of gold. This gave greater 
stability to commerce but also entailed loss resulting from 
the abrasion of coin, which has been and is still a source of 
anxiety to English statesmen and financiers.^ 

In 1833 Parliament passed an act making the notes of 
the Bank of England, so long as they are redeemed in gold 
on demand, kgal tender at all places in England and Wales 
except at the bank itself. 

Not until the year 1844 was any novelty introduced into 

the bank's methods of business. At that time the opinion 

prevailed generally that commercial crises were caused by 

excessive issues of bank notes. The exclusive right of issue 

granted to the bank in 170Q and 1742 had 
Sir Robert Peel, f ^ , , . „' , . . 

been so far relaxed m 1826 that jomt stock 

banks were allowed to issue notes at a distance of sixty-five 
miles from London; and seventy-two such banks had been 
established. England had been afflicted with commercial 
crises in 1825, 1836, and 1839. These were ascribed to over- 
issues of bank paper. Sir Robert Peel, the prime minister, 

1 See page 24. 

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was of the opinion that bank notes ought to be kept 
under rigid limitations, although book credits in the form of 
deposits might be safely left to the discretion of the banker. 
At his instance the charter of the bank (which was about 
expiring) was amended in the following manner : The issue 
department was to be wholly separate from the banking 
department The sum of ;^i4,ooo,ooo of securities, includ- 
ing the government's debt to the bank, was to be transferred 
to the issue department, which should there- 

TheActofi844. • ^4.uui-j ^ 

upon turn over to the bankmg department 
;£'i 4,000,000 of notes. This was the average amount of 
the bank's notes then outstanding. Any person should be 
entitled to receive notes from the issue department addi- 
tional to the aforesaid sum, in exchange for gold coin or for 
standard gold bullion at the rate of £$ lys. 9//. per ounce. 
Banks and banking firms having the right to issue notes at 
that time might continue to issue the same average amount ; 
but if any should cease to do so, the Bank of England 
might be authorized by the Privy Council to issue two-thirds 
of the amount so withdrawn, by adding an equivalent sum to 
the government securities in the issue department. Under 
the operation of this clause the circulation of the bank 
against securities has been raised to ;^i7, 775,000. 

The effect of the act of 1844 was to make the issue of 
notes automatic. Nobody has any discretion as to the 
amount of notes which shall be in existence at any time. 
Setting aside the fixed sum issued against securities, the 
remainder of the circulation is just what it would be if it 
were composed of gold exclusively. The additional notes 
represent merely the superior convenience of paper over 
coin in the way of manipulation and carriage. The bank 
itself cannot get notes on terms different from those 
open to the public. To get fresh supplies it must take 
gold out of the banking department and transfer it to the 

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issue department, and to recover the gold it must reverse 
the process. 

The restriction put upon the credit circulation in England 
in 1844 was coincident with a great increase of deposit 
banking, and it produced no immediate pinch. As popu- 
lation and trade enlarged, more media of exchange were 
needed. These came partly in the form of gold and of 
notes issued for gold, but chiefly in the form of bank 
checks. As the latter were the creation of trade, they were 
always commensurate with the wants of trade among urban 
populations and in places where banking facilities existed. 
It was an advantage also that they were available in sums 

smaller than £5- So PeeFs Act gave general 
tte B^k Act. satisfaction. Yet it has been the object of 

attack by some of the foremost English econ- 
omists and writers on banking.^ No other economic ques- 
tion, not even that of free trade, has been so hotly and 
persistently debated. The opponents of the act contend that 
it prevents the bank from using its credit in the only mode 
available for quelling panics, — that is, by the free issue of a 
currency that everybody will accept. They point to numer- 
ous crises prior to 1844 where the bank averted disaster by 
the policy of expanding its note issues. They point to three 
crises since 1844, — those of 1847, 1857, and 1866, — in each 
of which the government suspended the restrictive clause of 
the act and authorized the bank to issue notes at its own 

1 For an argument of great force against PeePs Act, see that of 
H. D. Macleod in the History of Banking in All Nations^ Vol. II, 
pp. 173-183. 

John Stuart Mill, when called as a witness before the House of 
Commons Committee in the crisis of 1857, said that he was against 
any restrictions by law of the issue of notes, except that of convertibility. 
He was in favor of removing the restrictions from the Bank of England 
and from all other banks. — Levi's History of British Commerce^ 
P- 399- 

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discretion.^ In all these instances the panic subsided as 
soon as it was known that notes could be had at a reason- 
able price. Suspension of the bank act, however, did not 
mean suspension of specie payments, but merely that the 
bank might issue notes at its own risk without a correspond- 
ing deposit of gold. Whatever notes the bank puts out at 
any time it must redeem in gold on demand. 

Thus the opponents of the act contend that it works well 
only in fair weather, but that in times of stress and danger it 
prevents the use of an adequate existing remedy, — namely, 
the credit of the Bank of England. In such cases, they say, 

safety can be found only by annulling the act. 
'^^^^^'^^^ The defenders of the act are compelled to 

admit this ; but they maintain that the restric- 
tion on note issues tends to check, although it does not 
altogether prevent, the speculations which lead to panics 
and crises. They think erroneously that notes are different 
from other forms of bank credit in their effect upon tbe 
prices of commodities and upon the foreign exchanges, and 
should therefore be restrained by law, even though they are 
immediately redeemable in gold. This was the main con- 
tention of Sir Robert Peel when he brought in his bill. It 
was repeated by Professor Jevons in 1875.^ Mr. H. D. 
Macleod has overthrown the argument of the former, in so 
far as it rests upon cited instances of experience.' The 
argument of the latter is inconclusive, to say the least. 

1 In 1857 the extra notes, if issued, were to be loaned at not less 
than 8 per cent interest ; in 1866 at not less than 10 per cent; and the 
interest was to inure to the benefit of the government, not of the bank, 
so that the public should not seek and the bank should not issue more 
notes than were actually necessary. In 1847 and in 1866 the bank 
did not make use of its permission to issue extra notes, but the panic 

2 Money and the Mechanism of Exchange (American edition), p. 314. 
* Theory and Practice of Bankings Vol. II, p. 150. 

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Yet, whatever the statesman of the present day might 
wisely and safely do if he had a tabula rasa on which 
to write the bank^s charter, he must have regard, first of 
all, to the fact that British commerce and British modes 
of thought have fashioned themselves upon the present 
system. It must be said also that with the passage of 
the act all anxiety respecting the goodness of the circula- 
tion disappeared. 

Another peculiarity of the Bank of England is that it 
holds the reserves of the other London banks and prac- 
tically those of the whole United Kingdom. All British 
banks, including those of Scotland and Ire- 

The Bank keeps land, keep a portion of their reserves in Lon- 

the Gold Reserve 

of the Nation. ^o^. All the joint stock and private banks 

of London deposit in the Bank of England 
all of their money except the small amount needed for pay- 
ing over the counter. It is more convenient for them to 
k^p it in the vaults of the bank than in their own. Their 
reserves range from lo to 15 per cent of their liabilities. 
The bank, in order to make a profit for its own share- 
holders, lends to borrowers about 60 per cent of its 
deposits. If a country bank keeps one-half of its reserve 
in a London joint stock bank and the latter lends 85 per 
cent of this to its customers, while the Bank of England 
lends 60 per cent of the remaining 15 per cent to its cus- 
tomers, it follows that only 6 per cent of the country bank's 
deposit in the city bank is available anywhere in the form 
of cash. 

Probably the ultimate reserve of the British banks reck- 
oned in this way is less than 6 per cent of their demand 
liabilities. The remaining 94 per cent is credit. It is pos- 
sible to transact the business of the United Kingdom on this 
small percentage of cash because the credit of the Bank of 
England is so good. Neither the great bank nor the lesser 

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ones are required by law to keep any fixed percentage of 
reserve, but keep such proportion- as experience shows to 
be needful. The Bank of England has found that its line 
of safety ranges between 33 and 47 per cent. The other 
London banks find that their needs are much less.^ The 
system under which this bank among many has become 
the keeper of the ultimate reserve of all, and under which the 
amount has so dwindled, is the growth of centuries. It was 
never invented by anybody, and if it did not now exist 
would be pronounced impossible. It has been likened to 
an inverted pyramid, — which, in fact, it resembles, with its 
huge mass of liabilities resting upon the relatively small 
amount of gold in the Bank of England, — but its equilib- 
rium is not likely to be put to a severer test than it was in 
the Baring panic of 1890, through which it passed success- 
fully. In that instance, in order to quiet public alarm, the 
Bank of England borrowed ;^3, 000,000 from the Bank of 
France, but the boxes which contained the gold went back 
to Paris unopened. 

The Bank of England has branches, nine in number, in 
the principal commercial cities of England. It pays to the 
government a fixed sum for the privilege of note issue, and 
it manages the public debt for an agreed compensation. It 
receives all the collections of revenue of the imperial govern- 
ment in England, pays the interest on the government's 
obligations, and, in general, performs the duties which in 
this country devolve on the Treasurer of the United States. 
Although it performs these functions, it is a private 

1 Mr. Goschen, when holding the office of chancellor of the exchequer 
a few years ago, made a public speech at Leeds, argidng that the 
London joint stock banks ought to have much larger reserves than 
they habitually keep, and intimating that if they did not voluntarily 
adopt that policy he should bring before Parliament a measure to 
compel them to do so. Not one of them ever adopted this advice, nor 
did Mr. Goschen ever bring in any measure to compel obedience to it. 

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corporation managed by directors chosen by the share- 
holders. Its public duties are regulated by contract. 
Aside from these duties, the government has no more 
control over it than over any other London bank. 

The following statement shows the condition of the Bank 
of England on February 19, 1902 : 

Issue Department 

Liabilities Rbsources 

Notes issued . . ;£^S2,876,78o Government debt ;£"i 1,015,100 

Other securities . . 6,759,900 

Gold coin and bullion 35,101,780 

;f 52,876,780 ;f 52,876,780 

Banking Department 

Liabilities Resources 

Proprietors* capital ;^ 14,553,000 Government securities;^ 17, 274,486 

Rest 3> 575467 Other securities . . 30,788,928 

Public deposits . . 16,798,893 Notes 24,335,160 

Other deposits . . 39,644,518 Gold and silver coin . 2,408,014 
Seven-day and other 

bills 231,710 

;f74,8o6,588 ;^74,8o6,588 

In 1844, when the issue department was separated from 
the banking department, the government owed the bank 
;^i 1,015,100. This debt has remained unchanged to the 
present time. The phrase "other securities," where it 
occurs under the issue department, means government 
securities other than this old debt. The same phrase, 
where it occurs under the banking department, means bills 
discounted and assets other than government securities. 
In the issue department notes are liabilities, but in the 
banking department they are resources because they are 
certificates for gold deposited in the issue department. 
In the foregoing statement the reserve is 47 per cent of the 
liabilities to the public. 

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Points of similarity and of difference between the English 
bank-note system and our own may be here noted : 

English American 

An arbitrary amount of notes All bank notes issued against 

issued against government securi- government securities ii^ the cus- 

ties in the custody of the bank; tody of the Treasury; no notes 

,no notes smaller than ;^5. smaller than ^^5.00. 

Bank notes in addition to the Gold certificates issued by the 

foregoing issued in unlimited Treasury in unlimited amounts on 

amounts on the deposit of gold the deposit of gold coin; none 

coin or bullion, y^ smaller than jj520. 



The monopoly of banking which existed in England from 
1709 to 1826 did not prevail in Scotland. In the latter 
country there was room for a development unrestrained by 
legal enactment, and this freedom led to interesting results. 
The Bank of Scotland was chartered in 1695 
Bankt*^*^*^^ with unlimited powers of note issue and with 

monopoly privileges for twenty-one years. 
When the monopoly expired in 1727, it was not renewed, but 
the bank continued to exist. In that year the Royal Bank 
was chartered. This institution, finding a scarcity of com- 
mercial paper in the market, devised a new method of using 
its unemployed capital, known as the system of cash credits, 
which forms a peculiar feature of Scotch banking. 

A cash credit is a permission extended by the bank to a 
borrower to draw money as it is wanted, not exceeding a 
certain sum, paying interest for the time and amount actu- 
ally used. The principal difference between a cash credit 

and an ordinary discount is that the former is 
Cash Credits. 

"accommodation paper," — that is, not based 

upon any completed commercial transaction. For this reason 

personal security, in addition to that of the borrower, is 

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required. The indorsers, or "cautioners," as they are 
termed in Scotch law, are never less than two in number 
and frequently three or more. The cautioner has the right 
to inspect the account of the borrower at any time, and to 
stop the credit at any point, if he wishes to terminate his 
liability there. Cash credits are based upon knowledge of 
the character of the borrower and of the responsibility of the 
cautioners. By means of cash credits young men of enter- 
prise and integrity are enabled to make a start in the world 
without waiting to accumulate capital from their own earn- 
ings. Sometimes, too, a business opportunity presents itself 
which a man would not undertake unless he could be sure 
of finding a certain amount of money before its completion. 
He may need it or he may not. A cash credit enables him 
to go forward with confidence. If he needs the money or 
some part of it, he pays interest for what he uses. Other- 
wise he pays nothing. Cash credits have played a large 
part in the development of agriculture in Scotland. The 
money advanced to farmers is not, however, loaned on 
mortgage, but on personal security, and the accounts are 
not allowed to stagnate. As a corollary to the system of 
cash credits, the Scotch banks pay interest on the time 
deposits of their customers and thus stimulate among the 
people the habit of saving. 

Another peculiarity of Scotch banking is its remarkable 
development ^f the branch system by which deposits are 
secured from every nook and corner of the country and by 
which capital is transferred easily and quickly 
s^stm*"^^ to the places where the demand for it is greatest. 

There are only ten banks in Scotland, but they 
have 1065 branches. The system has been so developed 
and extended that banking facilities reach every town and 
hamlet in the land. Whatever assistance banks can give to 
industry is available to the poor and to the rich on equal 

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terms. In no other country has the principle of equality in 

bank favors been carried further. In no other has greater 

pains been taken to bring them to the poor man's door. 

Until 1845 there was no legal limitation upon the note 

issues of Scotch banks. When PeeFs Act was passed in 

England, as described above, the principles embodied in 

it were applied to Scotland in a modified form. It was 

enacted that each bank might have an issue 
Note Issues. 

of notes equal to the amount of notes and 

coin then issued and held by it. For any additional notes 
it was to hold an equal additional amount of coin, but it 
was not required that this coin should be held specially for 
the redemption of the notes ; nor was there any provision 
for ascertaining whether the law was complied with in this 
particular. The commissioners of stamps and taxes were 
given power to examine banks for this purpose, but the 
power is never exercised. Indeed, the weak point in the 
Scotch bank system is the lack of effective public super- 
vision. Notes are issued in denominations of £^ and 
upward. They are exchanged daily at the Edinburgh 
clearing house and settlements are made between banks 
by drafts on London. No, deposited security for bank 
notes has ever been required in Scotland, but note holders 
have a prior lien on the assets. Moreover, the liability of 
shareholders for note issues is unlimited. For these rea- 
sons the note issues of insolvent banks in Scotland are 
always accepted at par by the other banks and are never 
depreciated. There have been only three bank failures of 
any importance in Scotland : those of the Ayr Bank in 
1772, of the Western Bank in 1857, and of the City of 
Glasgow Bank in 1878. These might perhaps have been 
prevented by proper public examinations. ^ 

Although deposits are received and loans are made at 
each branch, the branches pay out only the notes of the 

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Economy in the 
Use of Gold. 

parent bank, which are redeemable at the head office. So 
it is necessary to have real money only in one place, instead 
of in perhaps one hundred different places. 
Thus the maximum of business is done with 
the minimum of gold, which is the raison d^itre 
of banking. Credit has been systematized in Scotland to 
the last degree, and has been found to answer all purposes 
so long as the paper sovereign can be converted into the 
gold sovereign, at a convenient commercial center. The gold 
held by the banks is usually not more than 5 per cent of 
their deposits, yet the Scotch banks possess the undoubting 
confidence of the people whom they serve. 

The notes of the Bank of England are not legal tender in 
Scotland. There is no legal-tender paper there, nor has 
the want of it ever been a cause of complaint. 

On June 30, 1901, the liabilities and resources of the ten 
banks of Scotland, in millions of pounds, were as follows : 

Capital paid . . 
Surplus .... 
Undivided profits 
Circulating notes . 
Deposits . . . 
Other liabilities . 



Loans and discounts . £6()^6^2 
Government securities 10,684 
Other securities . . 23,027 
Cash and call money . 26,756 
Other resources . . 7,578 





In Canada there are thirty-four banks, with capitals rang- 
ing from $12,000,000 (the Bank of Montreal) to $180,000 
(the People's Bank of New Brunswick). No 
new bank can be established with less than 
$500,000 subscribed, of which at least $250,000 
must be paid before beginning business. All of the larger 
banks have branches, of which there are 690 in the Dominion, 

Canadian Bank 

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situated in 392 localities. Each bank is allowed to issue notes 
to an amount equal to its paid capital, but competition and 
the prompt return of the notes for redemption have always 
kept the circulation below the authorized amount. It is 
now about 54 per cent of their capital and surplus. All 
banks are required by law to make arrangements to insure 
the par value of their circulation in any and every part of 
Canada and for this purpose to establish redemption agen- 
cies at the chief city of each of the seven provinces and at 
such other places as may be determined by the treasury 

board. In practice the notes of the different 
Note Issues. 

banks are exchanged daily at the clearing 

houses in the larger cities. At other places they are 

exchanged between the nearest branches, and balances are 

paid either in Dominion notes or by drafts on the commercial 

centers. There is, accordingly, no discount on any Canadian 

bank note in any part of the Dominion. 

Nor is there any discount on the notes of failed banks. 
The law provides for the protection of note holders (i) by 
giving them a prior lien on all the assets of failed banks, 
including a liability on the part of shareholders of double 
the amount invested by them; (2) by a bank circulation 
redemption fund contributed by all the banks, equal to 5 
per cent of the average circulation of each ; and (3) by a 
provision that the notes of failed banks shall draw 5 per 
cent interest from the time of default till public announce- 
ment is made of readiness to redeem them. There have 
been three bank failures since 1890, when these provisions 
of law took effect, but the note holders lost nothing ; 
nor did the other banks lose anything from the common 
redemption fund. 

This fund was established by Parliament, at the instance 
of the bankers themselves. The law called for a contri- 
bution from each bank equal to i per cent per annum of 

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its circulation until the total amount should be equal to 

5 per cent thereof. It is in the custody of the Minister of 

Finance. It is invested in Dominion securities at 3 per 

cent, and the interest is paid to the contribut- 
Safety Fund. 

ing banks. In case of the failure of a bank 

its notes are redeemed out of this fund, and then the amount 
so expended is restored to the fund (with interest at 3 per 
cent) from the assets of the failed bank before any other 
claims are paid. The banks may be called upon for addi- 
tional contributions if needed, in order to keep the fund up 
to s per cent of the outstanding circulation, but the rate of 
contribution is not to exceed i per cent per annum. 

The Canadian system of note issues is based upon the 
"banking principle." It supplies an "elastic" currency, 
expanding and contracting with the variation of seasons 
and the wants of trade. Its system of branches tends to 

equalize the rates of interest in different parts 
Branch Banks. t 1 • • 

of the Dommion. A bank receiving deposits 

in Halifax, Montreal, and Toronto may lend them the 
following day through its branches, and by the issue of 
its own notes, at Winnipeg, Vancouver, and Victoria, the 
branches redeeming the notes by drafts on the head office 
when they are presented for that purpose. The rate of 
interest in the smaller towns of the West is only i or 2 per 
cent higher than in the large cities of the East on the same 
kind of loans. To this equalization of the rate of interest 
both the branch system and the freedom of note issue con- 
tribute. Under the branch system in Canada, as in Scot- 
land, many places which are too small to support separate 
banks are supplied with all the banking facilities they need. 
The parent bank is like a reservoir having pipes of different 
sizes running to different consumers, each of whom can draw 
as much from the general supply as he can advantageously 
use and give security for. 

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Under the Canadian law a bank may suspend payments 
for ninety days without going into liquidation; but it must 
not, in that interval, issue notes in payment of deposits, 
since that would increase the prior lien on the assets and 
the charge upon the common redemption fund. 

The weak point of the Canadian system, as of the Scotch, 
is the lack of government inspection. The Minister of 
Finance can call for a report of the condition of a bank at 
any time, but there is nothing which corre- 
DiM^ction^ sponds to our system of bank examination. 

In default of this the bankers have procured 
for their own chartered association legal powers of super- 
vision over the making of circulating notes and the delivery 
thereof to the banks, and the disposition made by the banks 
of such notes, and penalties for the breach or non-observance 
of the regulations applicable thereto. Thus the banks have 
the legal right to inspect each other so far as their note 
circulation is concerned, but in no other particular.^ 

The Canadian banks are not allowed to issue notes 
smaller than $5.00. The Dominion government, Hbw- 
ever, has legal-tender notes outstanding to the amount of 
$30,356,562, in denominations from $1.00 up to $5000, the 
latter payable only to order. The first issues of govern- 
ment notes were made in 1866, in a time of financial stress, 
while the Canadas were still separate provinces. About two- 
thirds of the government notes are held by the banks as a 
part of their reserves. The government notes are protected 
by a gold reserve of $16,427,864 and by sterling debentures, 
guaranteed by the British government, amounting to nearly 

1 " According to the opinion of Canadian legislators, as implied in the 
Bank Act, the depositor with a chartered bank is a person capable of 
looking out for himself. There is no requirement of a fixed reserve 
for his protection, no Governme/it inspection." — Breckenridge, p. 328. 

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The thirty-four Canadian banks have a paid capital of 
$67,591,311 and a rest, or surplus, of $37,364,708, and 
their circulation on December 31, 1901, was $54,372,788. 

The chief points of similarity and of difference between 
the Canadian system and our own are these : 

Bank notes are secured by a 
prior lien on assets including 
shareholders* double liability, and 
by a common safety fund equal 
to 5 per cent of total circulation. 
Failed bank notes draw interest at 
5 per cent. 

Banks are required to redeem 
their notes at the capital of each 
province and to keep them at par 

Banks are allowed to have 
branches in all parts of the 

Bank notes are secured by gov- 
ernment bonds and by a 5 per cent 
redemption fund in the Treasury, 
and by the government's promise 
to redeem at once without waiting 
to sell the securities. 

Banks are required to receive 
each other's notes at par in all 
payments to themselves, and to 
redeem their own notes at their 
counters and at Washington City. 

Branch banks not permitted 
under the national bank system, 
but any state bank having branches 
and entering the national system 
may retain such branches. 


The Bank of France was founded, with a capital of 
30,000,000 francs, in the year 1800, at the instance of 
Napoleon Bonaparte, then first consul. It was an ordi- 
nary bank of discount, deposit and note issue, like the first 
and second banks of the United States, which 
character it still retains ; but the government 
has never been a shareholder in it. It was 
placed under the management of fifteen regents and three 
inspectors, called "censors," chosen by the shareholders. In 
1803 the exclusive right of note issue in the city of Paris 

The Bank of 

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was conferred upon it. In 1806 a law was passed provid- 
ing that the chief of the state should appoint from among 
the shareholders a governor and two deputy governors of 
the bank. Under the present law the governor must;^be the 
owner of one hyndred shares of 1000 francs each, and 
each deputy governor must hold fifty shares. The governor 
has general direction of the affairs of the bank, presides at 
all meetings ofe the regents, and may veto any of their acts. 
No paper can be discounted that he disapproves of. He 
also appoints all the employees. This feature of the bank's 
organization has been retained under all changes of the 
government of France. The bank performs the same 
duties in the management of the public debt that the Bank 
of England performs in that country. 

In 1848 the exclusive right of note issue in the whole of 

France was conferred upon the bank, but it was required to 

buy the other note-issuing banks, which it did by increasing 

' its own capital stock to 91,250,000 francs. The monopoly 

of note issue was bestowed upon the bank in 
Wote Issues. , . .... , 

order to give greater stability to the paper 

currency, and it had that effect. The goodness of the notes 
of the Bank of France is never questioned, and its monopoly 
is not complained of. In consideration of the bank's serv- 
ices to the state, the government exacts no special compen- 
sation for the right of note issue, but requires it to pay the 
same taxes as other banks are liable to and also exacts 
a small stamp duty on its notes. The amount of notes 
issuable is fixed by law from time to time. In the last 
act renewing the charter the maximum sum was fixed at 
4,500,000,000 francs. The legislative body usually antici- 
pates the demands of commerce by extending the limit 
before the maximum is reached. The restriction upon its 
issues is, therefore, more apparent than real. The Bank of 
France is perhaps the most notable example and illustration 

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of the " banking principle " of note issues ^ that the wodd 

has ever seen. 

The amount of the bank^s uncovered notes is relatively 

small. On February 6, 1902, its total issue was 4,202,708,750 

francs and its specie on hand 3,571,011,561 francs. About 

one-third of the specie consists of silver five-franc pieces, 

which are available for the internal traffic of the country 

but not for foreign trade, since their metallic 
Cash Reserves. 

is much less than their nominal value. As 

they are legal tender, the bank must receive them as the 
equivalent of gold, but it may also pay them at par for all 
claims against itself. Accordingly, when depositors want 
gold for exportation, the bank is enabled to charge a pre- 
mium for it, the alternative being payment in silver. This 
premium is a source of profit to the bank. The limit to the 
possible premium is the cost of collecting gold coins, of 
which there is always a large amount in circulation, and 
which brokers are ready to supply if they are paid for their 
trouble. Usually the bank charges no premium, but at times 
it charges a fraction less than the cost of obtaining gold 
from brokers. If it should charge more, the public would 
sell its gold to brokers and deposit only silver at the bank. 
In the revolution of 1848 the bank suspended specie pay- 
ments, and its notes were made legal tender, but it was 
prepared to resume at the end of three months. The 
government, however, prevented it from doing so until 
August, 1850, at which time resumption took 

spede^'p^yments. P^^^^ ^"^ ^^^ legal-tender act was repealed. 
The bank suspended again in 1870, at the 
beginning of the Franco-German war, and its notes were 
again made legal tender. The bank at that time held 
specie nearly equal in amount to its outstanding notes, and 
equal to about 75 per cent of all its demand liabilities; and 

^ See page 322. 

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its officers were prepared to meet a run, besides making the 
usual advances to the mercantile community and the unusual 
ones which, it was foreseen, would be required by the govern- 
ment. Rumors had, however, gained credence that specie 
was flowing out of the country in large amounts to Prussia, 
and so public opinion demanded that the- bank should 
stop payments and that its notes should be made legal 
tender. On August 12, 1870, a law was passed to that effect. 
The same act limited the note issues to 1,800,000,000 francs. 
Two days later the limit was raised to 2,400,000,000 francs, 
and by subsequent steps to 3,200,000,000 francs in July, 
1872. The bank advanced to the government during the 
war with Germany and the later conflict with the com- 
mune 761,000,000 francs, and continued to make advances 
while the new republic was establishing itself, until they 
reached the maximum sum of 1,530,000,000 francs. About 
one-half of the sum thus advanced was specie. The pre- 
mium on specie at any time was, however, slight. Once it 
was as high as 4 per cent, but only for a short time. After 
the suppression of the commune it fell to i per cent. 

While Paris was besieged the parent bank could do noth- 
ing to assist the government of the national defense, but the 
branches were able to do so. M. Cuvier had been detailed 
by the bank for service at Tours, and it was at his instance 
that the Morgan loan of October, 1870, for 250,000,000 
francs was negotiated in London. This loan was guaranteed 
by the Bank of France.^ Specie payments were resumed on 
January i, 1878, but the legal-tender quality of the notes of 

1 « The period whose history we have briefly traced was the culmi- 
nating stage of the career of the Bank of France. Never before in any 
country had there been afforded a like example of an institution exer- 
cising such power, inspiring such implicit confidence, contributmg so 
decisively to the recovery of a people that seemed crushed, perform- 
ing more than its duty with impressive grandeur and simplicity. * The 
Bank,* said M. Thiers in a memorable speech, ' has saved the country 

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the bank was not repealed. It was retained at the instance 
of the business community outside of Paris, as a matter of 
convenience in the handling and transfer of money. 

The Bank of France is required by law to have at least 
one branch in each department of France. It has also a 
large number of subsidiary offices in places too small to 
support a branch with the usual complement of officers and 
employees. The rate of discount is uniform 
Diaw^ts*'*^ at the parent bank and at all branches and 
offices. During recent years it has been 
usually 2 J to 4 per cent, and is less fluctuating than in 
any other country. No paper is rejected on account of its 
smallness. In 1889 there were at the parent bank nearly 
20,000 discounts of 10 francs ($1.93) or less each, and more 
than 1,000,000 ranging in size from 51 to 100 francs. 

The chief points of difference between our banking system 
and that of France, as regards note issues, are these : 

French American 

One bank of issue with numer- Any number of banks of issue, 

ous branches. no branch banks. 

Cash reserve fixed by the bank. Cash reserve fixed by law. 

Notes siecured by the bank's Notes secured by government 

assets. bonds. 

Maximum amount of notes Amount of notes not to exceed 

fixed by law from time to time. the bank's paid capital. 

because it is not a state bank.' This remark was eminently true. In 

that supreme struggle a state bank would not have been able to resist 

the exactions of the Government, and its credit would have become 

confused with the credit of the state. The experience 

?lVi^^Z^^ of the Bank of France in 1870 and 187 1 is conclusive 
the Government. ' ' 

demonstration of the absolute necessity of assigning 

the responsibility for issuing paper money to independent institutions 

subject to such conditions of supervision and regulation as should incon- 

testably be administered by the Government." — M. Pierre des Essars 

in A History of Banking in All Nations ^ Vol II, p. 71. 

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The following is a statement of the condition of the Bank 
of France in millions of francs on February 27, 1902 : 

Resources Francs 

Gold 2,503,852 

Silver 1,104,419 

Discounts, Paris . . . 248,273 
Discounts, branches . . 400,182 
Advances on securities, 

Paris 165,107 

Advances on securities, 

branches 272,734 

Advances to government 180,000 

Other resources . , . 311,244 

5,185,811 5,185,811 

Although the Bank of France has a monopoly of note 
issues, it has numerous competitors in the field of discount 
and deposit, some of them of great strength. Foremost of 
these is the Credit Lyonnais, with a capital of 250,000,000 
francs. This bank has twenty-six agencies in Paris and its 
suburbs, one hundred and sixteen in the departments, and 
sixteen in foreign countries. 





Permanent surplus . 


Other surplus . . . 


Circulating notes . . 

4, 153*67 5 

Government deposits 


Private deposits, Paris 


Private deposits, branches 


Other liabilities . . 



The Reichsbank, or Imperial Bank of Germany, was 
grafted upon the stem of the Bank of Prussia in the year 
1875. Its establishment was one of the financial measures 
made necessary by the unification of the German monetary 
system after the war with France. The Bank 
^Ckj^^ny"*^ of Prussia was originally owned by the gov- 
ernment, which had contributed its capital of 
2,000,000 thalers, but it had grown to 20,000,000 thalers by 
the admission of private stockholders. The government, 
however, continued to control it. The German Empire 
bought the Prussian government's interest, raised the cap- 
ital to 120,000,000 marks, and disposed of the whole by 

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private subscription, — retaining, however, absolute control 

over it by means of an imperial board of directors, subject 

to the chancellor of the empire. By the bank act of 1875 

the president and the members of the board of directors 

are appointed by the Kaiser for life, on the recommendation 

of the federal council. The officers of the bank, although 

paid by it, are considered government officials, 

and they are not allowed to hold shares in 

the bank. The shareholders choose from their own number 

a central committee, who act in an advisory and supervisory 

capacity, but receive no salary. The central committee 

elects three members from its own number to sit with the 

imperial board of directors in an advisory capacity, and 

they are authorized and required to inspect the books and 

accounts of the bank ** in the presence of a bank director " 

and to make reports thereupon to the central committee. 

At the time when the bank act of 1875 ^^^ passed there 

were thirty-two independent banks in the empire which had 

the right of note issue. The general provisions of the act 

applied to them as well as to the Reichsbank. They were 

allowed to issue in the aggregate 1315,000,000 
Note Issues. 

nlarks and the Reichsbank 250,000,000 marks 

of uncovered notes. It was provided also that, if any of the 

independent banks should for any reason cease to issue 

notes, their rights of issue should pass to the Reichsbank. 

All but seven of them either abjured the right of issue or 

lost it by expiration of their charters on or before January i, 

1894. The uncovered issues of the Reichsbank were thus 

raised to 293,400,000 and have since been increased by law 

to 450,000,000 marks. 

Some provisions of the German system are of great 

importance, and should be compared with the English 

system, as established by the bank act of 1844. The 

German law, like the English, requires that, for all note 

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issues above the foregoing limits, the banks must have an 

equal amount of cash in their reserves, but it does not 

require them to hold this cash as a special redemption 

fund for the notes. Nor is the regulation an inflexible one, 

like that of the English act. Any bank may 

The Elastic exceed the limitation of the cash reserve by 

Feature. ^ 

paying to the imperial treasury a tax of 5 per 

cent on the surplus issue, provided that the Reichsbank 
shall maintain at all times a reserve, exclusive of notes of 
other banks, equal to one-third of its notes in circulation. 
Each note-issuing bank is required to publish, four times 
each month, a report of its assets and liabilities, showing 
particularly the state of its note circulation and of its reserve 
fund. If the note issues are in excess of the limitations 
above described, the tax is imposed immediately and is . 
repeated each week as long as the excess continues.^ Evi- 
dently this system of note issue was modeled upon the 
English one, but modified by English experience in the 
crises of 1847, ^857, and 1866, when it was found necessary 
to "suspend the bank act." To avoid the necessity of 
breaking the law on such occasions, the German act was 
made flexible and has been found to avert trouble in times 
of severe stringency. It must, therefore, be considered 
preferable to the English act.^ 

Bank notes are not legal tender in Germany. No bank 
note can be issued of less denomination than 100 marks 
($23.80), but smaller ones are issued by the imperial 
treasury. The Reichsbank is obliged to give its notes in 

1 In the year 1900 the Reichsbank paid to the treasury 2,517,853 
marks on account of this tax. 

2 " On" more than one occasion it seems certain that the operation of 
the elastic provision was successful in saving the German community 
from what would have been a severe spasm of contraction under the 
usual administration of Peel's Act." — Dunbar's Theory and History 
of Banking, p. 194. 

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exchange for gold bullion, at the rate of 1392 marks per 
pound fine. Banks may count the notes of other specie- 
paying banks in Germany and notes of the 
^sionT^^" imperial treasury as a part of their cash 
reserve. The Reichsbank has 320 branches, 
divided into four classes, according to the importance of 
the places where they are situated and the kind of business 
transacted by them. The Reichsbank usually redeems its 
notes at its branches, as well as at its head office in 
Berlin. The independent banks are required to redeem 
their notes at an agency either in Berlin or in Frank- 
fort, as well as at their own counters. All note-issuing 
banks are required to receive, in payments to themselves, 
the notes of other banks and must at once present them 
(except those of the Reichsbank) for redemption, or use 
them in payments to the issuing bank, or in other payments 
in the town where it is situated. 

A law was passed in 1900 to increase the capital of the 
Reichsbank to 180,000,000 marks, by the sale of new shares 
at 135, the premium to be added to the surplus fund. One- 
half of the new stock has been issued, and the other half is 
to be issued in 1905. 

The annual profits of the Reichsbank are apportioned in 

the following manner : (i) 3 J per cent (originally 4^ per 

cent) on the capital stock goes to the shareholders; (2) 

20 per cent of the excess goes to the surplus fund, until it is 

equal to one-fourth of the capital ; (3) the remaining surplus 

is divided equally between the shareholders 

Dividends. , , . . , .,1 i- -j j 

and the imperial treasury, until the diviaena 

to the shareholders reaches 8 per cent ; (4) any ultimate 

residue is divided in the proportion of one-fourth to the 

shareholders and three-fourths to the imperial treasury. 

If the net profits fall short of 3 J per cent on the capital 

stock, the residue is to be taken from the surplus fund. 

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The profits of the bank have advanced by leaps and bounds 
during recent years. In 1899 *^^ shareholders received 
lo^ per cent and in 1900 11 per cent, and the imperial 
treasury in the latter year received nearly 20,000,000 marks. 
The chief points of difference between our banking system 
and that of the German Reichsbank are these : 

Bank controlled by govern- 
ment exclusively. 

Circulating notes secured by 
bank's assets. 

A certain amount of notes 
issuable without conditions. 

Issues over and above the fore- 
going to be covered by an equal 
reserve of cash, otherwise a tax 
of 5 per cent on the excess. 

Banks controlled by share- 
holders exclusively. 

Circulating notes secured by 
government bonds. ' 

Amount of notes not to exceed 
bank's capital. 

Each bank to keep a deposit 
in the treasury, equal to 5 per 
cent of its circulating notes, for 
the redemption thereof. 

The following is a condensed statement of the condition 
of the German Reichsbank in millions of marks on February 
28, 1902 : 

Capital . . . 
3urplus . . . 
Circulating notes 
Deposits . . . 
Other liabilities 


1 50,000 





Metallic reserve ^ . . 
Imperial treasury notes 
Notes of other banks 
Bills of exchange . . 
Loans on securities . 


Other resources . . 









1 About one-fourth of the metallic reserve consists of silver thalers or 
three-mark pieces, which are le^al-tender coins akin to the five-franc 
pieces of France and to our silver dollars. 

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The Bank of England is a private corporation which ren- 
ders certain financial services to the government. In con- 
sideration of a loan of money Parliament, in 1694, granted it 
a charter with banking powers, and an annual payment for 
interest on the loan. The bank paid the stipulated sum to 
th« government and issued its own interest-bearing notes 
for an equal amount, which were bought by the public. With 
the capital thus replaced it began the business of discount 
and deposit. Three years later the bank made a new loan 
to the government and was authorized by Parliament to issue 
demand notes payable to bearer for an equal amount. These 
were likewise accepted by the public at par. In 1709 the 
government virtually granted to the bank the exclusive 
privilege of note issue ** in that part of Great Britain called 
England." From that time the indebtedness of the gov- 
ernment to the bank, and also the amount of its note issues, 
increased gradually until 1797, when the bank was forced to 
suspend specie payments on account of its large advances of 
money to the treasury for war purposes. The suspension 
continued until 1821. In 1826 the monopoly of the bank 
was relaxed, and the privilege of note issue was granted 
to joint stock banks at a distance of sixty-five miles from 
London. There were severe commercial crises in England 
in 1825, 1836, and 1839, and the opinion prevailed that they 
were caused by excessive issues of bank notes. This belief 
led to the passage of an act by Parliament in 1844, at the 
instance of Sir Robert Peel, by which the issue of notes as 
credit instruments of the bank was forbidden. By the terms 
of this act the function of note issue was wholly separated 
from that of deposit and discount, and became an automatic 
exchange of notes for government securities or for gold. 
The bank was allowed to transfer to the issue department a 

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fixed amount of such securities and to receive an equal 
amount of notes. In addition to this fixed amount, the 
issue department was to give notes in exchange for gold and 
not otherwise, and was to redeem all notes in gold on demand.^ 
The same principle was applied to all note-issuing banks in 
England. When the note-issuing privileges of any country 
banks should lapse, those of the Bank of England were to 
be increased, on condition that government securities of eqaal 
amount were placed in the issue department. In practice 
this system, which was adopted to prevent panics, has failed 
to do so, and it has been found necessary in times of great 
stringency to suspend the operation of the act and to allow 
the bank freedom to issue notes without the deposit of corre- 
sponding amounts of gold. No notes can be issued in Eng- 
land or Wales smaller than ;^5. The notes of the Bank of 
England are legal tender at all places in England and Wales 
except at the bank itself. 

The banks of Scotland are distinguished by the great 
extension and perfection of their branch system and by a 
kind of loans known as cash credits. There are only ten 
banks in the country, but they have all together more than 
one thousand branches. Every hamlet in the country has 
at least one office connected with a bank in a large city. At 
this office, or branch, deposits are received and loans are 
made with the same facility and freedom, and on substan- 
tially the same terms, as in the cities. The branches, how- 
ever, pay out only the circulating notes of the bank, which 
are redeemable at the head office. It is unnecessary, there- 
fore, to keep gold at more than one place. A cash credit is 
an authorization extended to a borrower to draw from the 
bank, within a certain period of time, a certain sum, or any 
part thereof, and requiring him to pay interest only for the 
amounts drawn and for the time they are kept. Cash credits 
are loans on personal security, not less than two indorsers 

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being required, frequently three or more. Loans of this 
kind to farmers are common, and they have been greatly 
conducive to the agricultural prosperity of the country. 
Cash credits are economical to the borrower because he 
pays nothing for his right to draw upon the bank but only 
for what he actually draws. Interest is allowed on all 
deposits. The note issues of the Scotch banks are regu- 
lated on the same principles as those of the Bank of Eng- 
land. Each bank is allowed to issue a certain amount of 
notes against its general assets. For all issues above that 
sum it must have a gold sovereign for each paper sovereign 
outstanding, but it is not required, as the Bank of England 
is, to keep this gold separate from its other assets. The gold 
held by the Scotch banks is usually not more than 5 per cent 
of their deposits. Each bank has an office in London and a 
balance on deposit in the Bank of England. The Scotch 
banks issue notes in denominations of £1 and upward. No 
bank notes are legal tender in Scotland. There is no system 
of public inspection or supervision of banks in Scotland. 

In Canada there are thirty-five banks. They have a sys- 
tem of branches like that of the Scotch banks, but their note 
issues are regulated on a different plan. They are allowed 
to issue notes to the amount of their paid capital, but are 
required to make arrangements which shall keep them at 
par in all parts of the country, and to this end they must 
have at least one redemption agency in each province of the 
Dominion. Each bank is required also to contribute a sum 
equal to 5 per cent of its circulation as a common fund to 
secure the prompt redemption of the notes of failed banks. 
This fund, held in the custody of the Minister of Finance, is 
invested in Dominion securities which draw interest at 3 per 
cent, and the interest is paid to the banks in proportion to 
their contributions. Note holders also have a prior lien on 
the assets of failed banks, including the double liability of 

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the shareholders. The notes of failed banks draw interest 
at 5 per cent. The safety fund, the prior lien, and the inter- 
est clause have been effectual to prevent any depreciation of 
the notes of failed 'banks in Canada since those provisions of 
law went into force. There is no government inspection 
of banks in Canada, but the incorporated association of 
Canadian bankers is empowered by law to inspect the note 
issues of all banks and to keep them within the limitations 
of the law, with power to punish infractions. 

The Bank of France is a private corporation which dis- 
charges public functions similar to those performed by the 
Bank of England. Its affairs are managed by a board of 
regents chosen by the shareholders. They act, however, 
under the general direction of a governor chosen from 
among the shareholders by the chief of the state. The 
governor has power to veto any act of the regents. He 
also appoints all employees of the bank. The bank has the 
exclusive right of note issue in France, and its notes are 
legal tender. The maximum amount of its issues is fixed by 
law from time to time. Its metallic reserve is not regulated 
by law, but is usually Ao^ger cent or more of its note circu- 
lation. In specie holdings it is the strongest bank in the 
world. The government does not exact any compensation 
from the bank for the monopoly of note issue, but it imposes 
a small stamp duty on the notes. The bank suspended 
specie payments in 1870, during the Franco-German war. 
The suspension was prolonged, at the instance of the gov- 
ernment, till 1878, but the discount on its circulating notes 
during the greater part of this time was so small as to be 
scarcely noticed. The bank has a large number of branches 
and subsidiary offices in all parts of France, where commer- 
cial paper is discounted and loans are made on securities. 
The rate of interest on loans is uniform at the parent bank 
and at all branches and offices. In its system of note issue 

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the Bank of France is a conspicuous example of the " bank- 
ing principle," as the Bank of England is of the ** currency 

The Imperial Bank of Germany is owned wholly by private 
shareholders, but is under the exclusive control of the gov- 
ernment. Its board of directors is appointed by the emperor, 
on the nomination of the federal council, and all the officers 
of the bank are considered as government employees. The 
directors are responsible to the chancellor of the empire. A 
committee of the shareholders sits with the board of directors 
in an advisory capacity, inspects the accounts from time to 
time, and makes reports thereon to the shareholders. The 
bank has the right of note issue, — a right which will become 
exclusive whenever the issues of certain independent banks 
shall have ceased. The method of note issues is a modifica- 
tion of that of the Bank of England The bank is allowed a 
fixed amount of uncovered notes. For all above that sum it 
must have in its reserves an equal amount of cash, but this 
is not, like the English law, an inflexible rule. The bank 
may issue uncovered notes in excess of the prescribed limits, 
on condition of paying a tax of 5 per cent per annum on the 
excess, but its reserve must not at any time be less than one- 
third of its outstanding circulation. This elastic clause has 
been vindicated by experience. It has afforded relief to the 
business community in several periods of monetary stringency, 
and without any harmful consequences. The Imperial Bank 
is required to give its notes in exchange for gold coin or 
bullion, but bank notes are not legal tender in Germany. 
All note-issuing banks are required to receive each other's 
notes at par and to redeem their own notes at Berlin or 
Frankfort, as well as at their own counters. The net profits 
of the* Imperial Bank are divided between the shareholders 
and the imperial treasury in a proportion fixed by law. The 
Imperial Bank has 320 branches. 

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Francis' History of the Bank of England, 
Rogers' First Nine Years of the Bank of England, 
Levi's History of British Commerce, 

A History of Banking in All Nations^ published by Xhtfournal 
of Commerce and Commercial Bulletin (New York, 1896). 
Macleod's Theory and Practice of Banking, 
Somers' Scotch Banks and System of Issue. 
Breckenridge's Canadian Banking System. 
Dunbar's Chapters in the Theory and History of Banking, 
Conant's History of Modern Banks of Issue, 

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It has been the author's aim in the preceding chapters to 
enable the reader to reach right conclusions in reference to 
the currency problems now (1902) confronting us. 

The principal defect of our national bank system is the 
frigidity of its note circulation. In a broad sense the vol- 
ume of notes is regulated, not by the wants of 
Wo1;e*iMueT °* trade, not by the amount or kind of commer- 
cial paper offered for discount, but by the mar- 
ket price of United States bonds. Even if the bonds were 
sufficient in amount and satisfactory in price, the note circu- 
lation would still be lacking in the elasticity which should 
characterize a good system. By elasticity is meant the 
capacity to increase or diminish in volume in accordance 
with the needs of the community, and simultaneously there- 
with. It has been shown in a previous chapter that where 
note issues are unrestricted the amount of notes outstanding 
at any time depends not upon the volition of either the 
banker or the depositor, but upon the public demand.^ 
There are some seasons of the year, also, when a greater 
quantity is wanted than at others, and these familiar ebbs 
and flows vary in different localities and in different 
trades. A flexible currency is one which rises and falls 
in volume harmoniously and simultaneously with these 
trade movements. 

^ See page 223. 

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Note issuing is, to the banker, simply a question of profit. 
When he buys bonds and deposits them in the Treasury as 
security for circulation, he virtually buys notes from the 
government ; and his question is whether he can get more 
profit by such an investment than by using his capital in other 

ways. Aside from the interest on the bonds, 
tor^wotes^^™^"* ^^^ gains arise only from the average amount 

of his notes which the public will take and 
hold. There will always be some notes in transit to Wash- 
ington for redemption and thence back to the bank; and 
after they come home they will remain unused for a while. 
During this period they are unproductive capital. Therefore 
the banker will take from the government no more notes than 
he thinks he can keep in circulation. He will hold none for 
emergencies. Thus the national bank currency remains for 
long periods nearly uniform in amount, while in countries 
where notes are issued according to the "banking principle" 
there is a seasonal outflow and inflow of notes correspond- 
ing to the greater or less demand for them. The contrast 
between Canada and the United States in this particular is 
very marked, as appears from the charts^ on the opposite 

In every country the alternations of seedtime and harvest 
have a marked influence upon the currency movement. 
During the spring and early summer, when the farmers are 
engaged in planting and tilling their crops, they usually 
incur debt to the country merchants for household supplies; 
and the currency movement is then sluggish. When harvest 
comes, a great deal of work must be done within a short 
space of time, and this requires a large amount of currency 
to pay the wages o.f laborers and to meet the various claims 
against the farmers which then mature. These seasonal 

1 These instructive charts are taken from the final report of the 
Indianapolis Monetary Commission, pp. 319-320. 

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demands are imperative. They come almost simultaneously 
in large sections of the country. Every other demand for 
currency is secondary to this, since the only time to harvest 
the crops is when they are ripe. 


1894 1 


























Note Issues of the Canadian Banks 















^ ^ 

Note Issues of the National Banks of the United States 

The annual crop movement in Canada is marked by an 
uplift of the note circulation, while no corresponding rise is 
observable in the United States. What takes place among 
us is a movement of the currency itself from one part of the 
country to another, or from the commercial centers to the 

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farming districts, and a reverse movement after the bulk of 
the autumnal grain and cotton is sold and housed. This 
money has to be carried long distances and guarded at con- 
siderable expense and with loss of interest, and these costs 
fall upon the agricultural community, since the work of 
moving must be compensated out of the things moved. In 
Canada it costs nothing to keep bank notes in the bank's 
vaults from one crop-moving season to the next. Accord- 
ingly they are always on hand at the places where they are 

Our national bank currency not only fails to meet the 

varying demands of the seasons, but fails to respond to the 

nation's growth in population and commerce. 

Shrinkage of rpj^^ volume of bank notes reached its maxi- 

mum, $358,742,034, in 1882. Then it began 

to shrink. In 1892 it had fallen to $172,683,850, or about 

one-half the sum outstanding ten years earlier. In 1893 a 

rise began and continued till 1900, when it was accelerated 

by a change of the law, . which authorized an addition of 

10 per cent to the currency issuable on the security bonds. 

The net amount was thus brought up to $323,863,597 on 

September 30, 1901, which is $30,000,000 less, however, 

than the amount in circulation twenty years ago. Now 

(1902) a fresh decline has begun. Banks are allowed to 

retire their circulation, at a rate not exceeding in the 

aggregate $3,000,000 per month. Nearly $17,000,000 has 

been thus retired during the six months ending March 

31, 1902. This movement is accounted for by the price 

of government bonds, which ranges from 106 J for the 5 J. 

of 1904 to i39i for the 4J. of 1925. In the 
Bond^*™^^™ ^* case of the former, the premium ($6500 on 

$100,000) will be wiped out in two years. 
The profit to be realized on $100,000 of circulation so 
secured may be computed thus : 

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Interest on circulation at 6 per cent ;^6,ooo.oo 

Interest on bonds 5,000.00 

;^ 1 1,000.00 

Less tax $1,000.00 

Cost of redemption 4S-oo 

Express charges 3.00 

Plates 7.50 

Agents' fees 1 7.00 

Sinking fund for bond premium 3,250.00 



Interest at 6 per cent on cost of bonds (;^i 06,500) . . . 6,390.00 

Net profit on $100,000 circulation $297.50 

or less than three-tenths of i per cent over and above the 
amount realizable from the capital represented by the bonds. 

A similar calculation based upon the.othej classes of 
bonds shows that the profit on the 2s. of k^ffAs $796 ; on 
the 3 J. of 1908, $440 ; on the 4^. of i^o'jA$/^6^ ; and on the 
4^. of 1925, a loss of $125 on each $100,000 of circulation.^ 

In this computation no allowance is made for loss of inter- 
est on circulating notes while in transit from the redemption 
bureau to the bank, or for the time that notes remain unused. 
Whenever a package of notes is returned, there will be an 
interval, greater or less, before they begin again to make 
earnings for the bank. About one-fourth of the circulation 
passes through the redemption bureau each year. This 
movement involves an appreciable loss of interest, but we 
have no data for determining its actual amount. Evidently 
the profit on bank notes is too small to keep the volume of 
circulation steady, — not to mention the demands of an ever- 
increasing population and commerce. In cities, where banks 
abound, these demands are met by deposits and checks ; but 
in places where population is sparse and banking facilities 

1 The agents* fees are paid by the banks to the agents in Washington 
appointed by them to witness the destruction of circulating notes. 

2 See Report of the Comptroller of the Currency for 1901, p. 308. 

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few, the failure of the note circulation is a serious drawback 

to the general prosperity, for if rural banks cannot make 

some profit from note circulation they cannot exist, and thus 

deposits and checks are cut off also. 

Branch banks have been suggested as a means of bringing 

the capital of the large cities to the small towns. The two 

federal Banks of the United States and the State Bank of 

Indiana were notable illustrations in the past of the benefits 

of that system. The Scotch, the Canadian, the French, and 

the German systems of to-day are even more conspicuous 

as living examples of it. But in every case where branch 

banking has achieved great success it has 
Branch Banks. 

been coupled with substantial freedom of note 

issue. However useful it may be as a channel for the distri- 
bution of capital, it is still more so as an instrument of credit. 
A Scotch bank with one hundred branches does not divide 
its capital into one hundred parts. It lends its notes at 
the branches and redeems them at the head office. Local 
redemption is dispensed with and is, in fact, quite unneces- 
sary. - Economy of capital, of time, and of labor are here con- 
joined, but this would not be possible without practical 
freedom of note issue. A Canadian bank may receive 
deposits in Halifax to-day and lend them in Winnipeg 
to-morrow because it can issue its notes promptly at the 
latter place. If it were obliged to wait till it could transmit 
'the money from Halifax by express, time and interest would 
be lost. If it could not issue its own notes without first 
buying bonds, lodging them in a government office, and 
"taking out" currency, the entire profit of the loan might 

be dissipated. Branch banking is permissible 

Their Relation ^ ^^ ^ ^^ ^^^^ ^f ^^ ^^^^^^ ^^ ^^^ 
to Note Issues. 

Union. Yet the permission has not been 

utilized to any considerable extent, — for the reason, prob- 
ably, that the note-issuing faculty does not accompany it. If 

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this is the true reason, then we may doubt whether, if per- 
mitted by law, it would find any wide extension among 
national banks under the present rigid system of note issues. 
Yet apart from note issues, branch banking has the advan- 
tage that it can be extended to places too small to support 
a regular bank, which requires a full comple- 
Advantages nient of officers and a reserve of coin or green- 

backs. Some of the branches of the Scotch 
banks are offices of one room, which are opened only two or 
three times each week, and are served by an agent from a 
larger branch, who serves other small places in the neighbor- 
hood on alternate days. These small places have all the 
banking facilities that they need, while without the branch sys- 
tem they would not have any. Another advantage of branch 
banking consists in the facility which it affords for communi- 
cating knowledge of the relative needs of business in differ- 
ent places and for responding to them. Knowledge of the 
demand and supply of money would be quickly conveyed by 
the branch at the small town to the parent bank in the city, 
and funds could be quickly transferred to the branch, either 
from the parent bank or from any other branch where the 
demand was less pressing. Under such a system the rates 
of interest would tend toward equality, as between the large 
cities and the small towns. 

Whatever the benefits of branch banks in other coun- 
tries may be, they cannot be enjoyed in the same ratio here 
until we have a credit currency. Events, how- 
Extmction of the ^^^^^ ^^^ pushing US that way. It may be 

assumed that within a comparatively brief 
period the bonded debt of the United States will have been 
wholly redeemed and canceled. It is not probable that the 
nation will continue for an indefinite period to pay interest 
on a debt of which it might easily pay the principal. Such 
a policy would be unjust to the taxpayers, and could not fail 

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424 BANKINta 

to meet public condemnation. So the problem is not merely 
how to make note issuing under the present system a little 
more profitable, but how to keep the system going at all. It 
cannot be done, except by using other securities than United 
States bonds. To use inferior securities, like municipal, or 
railroad, or " industrial '' bonds, would require the exercise 
of discrimination on the part of public officers in the selec- 
tion of them, and would thus open the door to political influ- 
ence in making the selection. Moreover, the best judgment 
of the most impartial comptroller of the currency would at 
times be at fault, as was frequently the case under the state 
systems of bond-secured currency before the Civil War. 

How to meet the approaching crisis is the chief banking 
problem of the present day. Any plan for obtaining a real 
credit currency — a currency based upon the assets of the 
banks — must have regard to the traditions, habits, and 
experience of the American people. The smallest change 
consistent with the end to be achieved will be the one most 
likely to succeed.- A bank of banks was suggested by the 
Secretary of the Treasury in the following paragraph of his 
annual report for 1901 : 

We justly boast of our political system, which gives liberty 
and independence to the township and a limited sovereignty to the 
State, while it confers upon the Federal Government ample powers 
for a common protection and the general welfare. Cannot the 
principle of federation be applied, under which the banks as indi- 
vidual units, preserving their independence of action in local rela- 
tionship, may yet be united in a great central institution? Formed 
by some certain percentage of capital contributed by the banks 

themselves, and its management created through 
A Central Bank. . rr r „ . ,j i. .u • 4. * 

the suffrage of all, it would represent the mterests 

of the whole country. With limited powers of control over its 
membership in the interest of common safety, confined in its deal- 
ings to the banks and to the Government, it could become the 

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worthy object of a perfect public confidence. By the concentra- 
tion of unemployed reserves from sections where such reserves 
were not needed, it could redistribute them in part as loans where 
most needed, and thus bind together for a common strength and 
protection the loose unrelated units, in whose separation and isola- 
tion the greatest weakness of our banking system is now to be found. 

This plan is limited in terms to the keeping of the reserves 
of other banks and to the redistribution of the same as loans 
to the constituent banks. It is true that our 
^se^r*^'*" system lacks an institution of the magnitude 
and credit of the Bank of England, the Bank 
of France, or the Imperial Bank of Germany. This is a 
serious defect. Thus the reserves of cash required under 
our system are much larger than would be needful if we had 
such a bank. The cash reserves of our national banks on 
September 30, 1901, were nominally 27.65 per cent of their 
net liabilities. In this reckoning a considerable amount of 
money is counted twice, since country banks are allowed to 
deposit three-fifths of their cash in banks An reserve cities, 
while the latter may deposit one-half of theirs in central 
reserve cities.^ The actual reserve which could be produced 
in "lawful money" at the date named was $548,493,362, or 
15 per cent of the banking liabilities. 

The trade of the United Kingdom can be carried on with 
a cash reserve of 5 or 6 per cent,^ because the longevity, the 
traditions, and the concentration of capital in the Bank of 
England have produced an universal belief that it cannot 

1 The actual reserve held by the three classes of banks exceeds the 
legal requirement. The average reserve of the country banks was 27.56 
per cent, the legal reserve being 1 5 per cent. That of the reserve cities 
was 29.36 per cent, — legal reserve 25 per cent. That of the central 
reserve cities was 26.16 per cent, — legal reserve 25 per cent. A useful 
discussion of the " Deposit Reserve System of the National Bank Law " 
is that of Prof. Edward S. Meade in the Journal of Political Economy , 
March, 1898. 2 See page 391. 

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fail. But as we have nothing which corresponds to this 
state of facts or to this state of mind, there is need for a 
larger percentage of cash to protect our banking liabilities. 
Our need of such a bank has been much discussed at 
bankers' conventions of late, but the difficulties in the way of 
securing it are very serious. Such a bank, in order to real- 
ize its greatest benefits, should be invested 
A Central Bank. ... , . - . , , 

With the exclusive power of note issue and the 

exclusive custody of government funds. The grant of these 
monopolistic powers, however, would lead to a struggle among 
the rich to control the bank, and would array popular preju- 
dice against it. Such a plan could not command many votes 
in Congress. Accordingly, those persons who favor it say 
that they do not contemplate a new Bank of the United 
States, but merely a spontaneous growth, a fortuitous con- 
course of banking atoms, which they think would take place 
if branch banking were allowed. There can be no objection 
to a central bank which takes form spontaneously; but of 
course it could, not acquire the deposits of the government, 
or any powers of note issue, except by virtue of national law. 
The question whether there ought to be any percentage of 
banking reserve fixed by law is occasionally brought into 

debate. The United States is the only coun- 
Reserve ^^y which requires a minimum cash reserve 

against deposits. Ordinarily, however, the 
national banks keep a larger average reserve than the law 
prescribes, and the country banks, whose legal requirement 
is the smallest of all, actually keep the largest percentage.^ 

1 The reason why the country banks keep so large a cash reserve is 
that checks drawn upon them have to be paid mostly in currency, instead 
of being offset by book balances or by bank clearings. If the country 
banks could issue their own notes freely, they would practically be on the 
same footing as the city banks in the matter of reserve requirements, and 
would not be under the necessity of drawing so heavily in harvest time 
on the banks in the reserve cities. 

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Therefore it cannot be said at the present time that the law 
is a hardship to any class. Among four thousand banks, 
large and small, scattered over a wide territory, there will 
always be some reckless, or ignorant, or unprincipled man- 
agers who, in their eagerness for profit, will allow their 
reserves to fall below the danger point. In other kinds of 
business the penalty of bankruptcy is the most fitting end to 
rascality or rashness, but in the banking world one failure 
begets others and may bring ruin upon a whole community. 
Therefore the legal reserve provision of our national bank 
act must be considered wise under present conditions. 

Should a bank be allowed to count the notes of other 
banks as a part of its cash reserve ? Nobody would think 

of allowing a bank to count its own notes, 
Reswves***" which are its debts, as a part of its cash. 

Obviously, then, it would not be wise to allow 
two banks to count each other's notes as reserves. Such a 
result might be achieved by simply exchanging notes, and then 
they might report full reserves when they had no real cash 
at all. As the law does not now permit the counting of bank 
notes as reserves, each bank has a motive for sending the 
notes of other banks to Washington for redemption in " law- 
ful money." This is desirable, since it prevents stagnation of 
the note currency. It compels each bank to keep its assets 
in a liquid state, so that it may always have the means of 
redemption at hand. Under the Suffolk system the bank 
notes of the New England States were redeemed, on the 
average, ten times each year ; ^ and there can be no doubt 
that the spur of frequent redemption vf'zs a most potent aid 
to sound banking, — much more effectual than any that 
the diverse and conflicting laws of those states supplied. 

Our national bank act needs amendment in its note-issuing 
feature, not in the direction of making redemption more 

1 See page 326. 

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sluggish than it now is, but the contrary. Elasticity of the 
note circulation, which was so marked under the Suffolk system 
and which prevails in Scotland and in Canada, requires fre- 
quent redemption of note issues. Expansion of the currency, 
when need arises, implies contraction when it has passed 
away. The one process is as useful as the other. But a 
bond-secured currency cannot be elastic. Many plans for 
securing the needed change in our system have been pro- 
posed. The best of these is the one presented by the 
Indianapolis Monetary Commission.^ The plan contem- 
plates the retirement and cancellation of the government's 
legal-tender notes in proportion to the increase of national 
bank notes under the system, but the one process is not 
conditioned upon the other. 

Under this plan, bank notes are to be a first lien on the 
assets of the issuing bank, including the personal liability of 

the shareholders. The superior claims of note 
pum^****^^**^* ^^^^^'^ ^ ^^^^ ^^^ depositors of a bank rest upon 

the fact that the societary movement cannot 
go on without a currency, and that the very term "currency" 
implies that whatever passes from hand to hand shall be 
accepted without hesitation or dispute. This cannot be the 
case with a bank note if there is any doubt about its goodness. 
Therefore the first step to be taken by a government, which 
authorizes the issuing of notes to circulate as money, is to 
provide that they shall be worth what they purport to be. 
The government has so provided in the existing law, by 
requiring that a sufficient portion of the assets of. each note- 
issuing bank shall first be set aside and held in the Treasury 
for the redemption of its notes. If the preference given 
to note holders in the Indianapolis plan is regarded as an 
injustice to depositors, the same injustice exists under the 
terms of the present law. 

1 See Appendix B. 

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No bank note is to be issued of less denomination than 
$10. The object of this provision is to give the field of cir- 
culation for smaller sums to silver coin and silver certificates. 
Under existing law, no bank notes can be issued smaller than 
$5.00, and only one-third of the issues of any bank can be of 
that denomination. Bank notes are to be prepared and deliv- 
ered to the banks by the comptroller of the currency, but no 
bank is to receive or issue notes in excess of the amount of 
its paid and unimpaired capital after deducting its investment 
in real estate. 

Each bank is to maintain the present 5 per cent redemp- 
tion fund and to deposit in the Treasury an additional sum 

equal to 5 per cent of its outstanding circula- " 
The^Guaranty ^^^^^ ^^ ^^ known as the " Bank Note Guaranty 
Fund." This is to be applied to the redemp- 
tion of the notes of any failed bank. Any portion of the 
money in the guaranty fund may, at the discretion of the Sec- 
retary of the Treasury, be invested in United States bonds, 
the interest thereon to be added to the fund, — not paid 
to the contributing banks, as is provided in the Canadian law. 
The guaranty fund, when reduced by bank failure, is to be 
made good out of the assets of the failed bank before any 
other claims are paid. If the fund is at any time reduced 
below 5 per cent of all outstanding circulation, the comptroller 
of the currency is to make an assessment on the banks, in 
proportion to their notes, to replenish it. The plan contem- 
plates the substitution of the guaranty fund in place of the 
existing bond security, by the gradual withdrawal of the lat- 
ter, so that at the end of ten years from the passage of the 
act no bond deposit shall be required. The existing pro- 
vision of law, by which all national banks are compelled to 
receive the notes of other banks at par in the payment of 
debts to themselves, is to remain in force ; also the provision 
by which the government is required to receive bank notes at 

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par for all public dues except duties on imports. Section 39 
of the proposed bill repeals that portion of the present law 
which provides that national bank notes shall be received at 
par for all debts owing by the United States. Therefore every 
holder of a failed bank note can pay it to the government at 
par, and the government cannot pay it to anybody without the 

consent of the payee. No person or corpora- 
R^Ip^biUty. ^^^^ ^^"^^ ^^^^ anything by such notes, nor 

could the government itself lose by them. 
Ordinarily it would pass the bank notes received in the 
course of business on to the redemption bureau at Wash- 
ington and there obtain legal-tender money for them. Any 
* failed bank notes received would be passed into the guaranty 
fund, where legal-tender money would be obtained for them. 
In case of a deficiency in the latter fund, the power of 
requiring fresh contributions would remain ; but the experi- 
ence of the past assures us that no such deficiency would 
occur.^ It might be well to add a provision like that of the 
Canadian law, that failed bank notes should bear interest 
at 5 per cent till public announcement should be made of 
readiness to redeem them. This would certainly prevent 

It is not probable that the circulation of the banks under 
the proposed system would . usually exceed 80 per cent of 
their capital. Upon any excess over 80 per cent of capital 
the bill imposes a tax of 6 per cent. This gives opportunity 
for an emergency circulation like that which has been found 
so effectual in times of panic in Germany.- 

1 A guaranty fund of 5 per cent on the present circulation of national 
banks would be upwards of $15,000,000. The total circulation of banks 
that have failed during the forty years that the system has been in force 
has been only $23,559,915. The assets of these banks, including the 
contributions of shareholders, have yielded this sum minus $1,352,612. 
A guaranty fund of one-half of i per cent would have covered this loss. 

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It thus appears that, under the Indianapolis plan, note 
holders are secured (i) by all the precautions of the 
national bank act as regards payment of capital, with public 
supervision and examination ; (2) by a prior lien on the 
assets and on the stockholders* liability; (3) by a 5 per cent 
redemption fund ; (4) by- a 5 per cent guaranty fund with 
power to replenish it as necessary ; (5) by a practical restric- 
tion of note issues to 80 per cent of the unimpaired capital 
of the issuing banks ; (6) by what is practically equivalent 
to government redemption of the notes.^ Objections to this 
plan based upon supposed danger of loss to note holders are 
obviously groundless. 

1 The last clause of Section 34 of the bill disclaims government respon- 
sibility for the notes beyond the proper application of the funds and due 
enforcement of the remedies provided ; but, since the government itself 
will in practice be the last holder of every note which falls below par, 
such disclaimer is meaningless. 

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We have, at the present time, the following kinds of cur- 
rency in daily use: (i) gold coin; (2) gold certificates; 

(3) legal-tender notes, including Treasury notes of 1890 ; 

(4) silver dollars ; (5) silver certificates ; (6) national bank 
notes ; (7) subsidiary coins. All of these, except the first, 
the second, and the seventh, need amendment. 

Under present conditions gold certificates are indispen- 
sable, since they are the only form of paper currency 

absolutely good, obtainable at short notice 
Gold Certificates. , . , 01 

and m large amounts. So long as the gov- 
ernment is charged with the duty of maintaining the gold 
reserve of the country, the machinery which it employs for 
this purpose may be properly utilized for the reception and 
storage of gold for private persons and the issuance of 
receipts therefor. 

The legal-tender notes are political money. They were 
created by Congress in the first instance (1862) for war 

purposes, and in the second instance (1890) 
H^tes'^^"^^' for party purposes. Under existing decisions 

of the courts. Congress can issue as many 
more as it pleases and for any purpose whatever. It may, 
or may not, redeem them. They are a menace to the mone- 
tary equilibrium, to the validity of contracts, and to the 
stability of business. They ought, therefore, to be retired 
and canceled. This may be accomplished by funding them 
in interest-bearing bonds, or preferably by applying a certain 


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portion of the surplus revenue of the government to the 

extinction of them, or by gradually supplanting them with 

national bank notes as contemplated in the Fowler bill.^ 

Silver dollars are in the nature of metallic greenbacks, but 

they cannot be increased in quantity by the mere fiat of the 

government. To produce them requires the 
Silver Dollars. *", r.f-,. ■,- 

purchase of metal and the expenditure of 

labor in coining ; and much time must be consumed in order 

to procure any considerable sum. It is not likely that the 

country will so far forget the lessons of the past as to resume 

such coinage. By prohibiting the use of other forms of 

money of denominations smaller than $io, it is probable 

that all the existing silver dollars and certificates will be 

needed for the purposes of retail trade and will therefore 

be at par with gold. Yet, in order to remove all doubts and 

to make the currency system consistent, the silver dollars 

should be made exchangeable for gold at the Treasury. 

Since the silver certificates are merely tickets for silver 

dollars, they need no special treatment. 

The principal defect of our national bank note system is 

its want of elasticity. It does not increase or diminish in 

volume in accordance with the demands of 

Bank Notes. . . « . <. 

commerce, but m response to the price of 

United States bonds. Bank notes are issued and retired for 
the sake of profit. When the premium on bonds rises to a 
certain figure, it is profitable for the bank to retire its circu- 
lation and sell its bonds. This process is now (April, 1902) 
going on at the rate of about $3,000,000 per month. The 
difficulties which face us in the attempt to procure a bank 
note currency which shall be both elastic and secure are 
found in the great number of small independent banks 
scattered over a wide extent of country. That these diffi- 
culties are not insuperable may be learned from the example 
1 See Appendix C. 

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of the Suffolk Bank system, which met and overcame even 
greater difficulties in the New England States in the middle 
of the last century in the manner described in a previous 

The difficulties which the Suffolk Bank faced were greater 
than any that now confront us. At the beginning and during 
the early years of the system there were no railways and no 
telegraphs. The laws of the several states were not uniform. 
There was no system of bank examination. There was no 
public registration of note issues, no enforceable limita- 
tion of the amount, and no uniformity of appearance. The 
Suffolk Bank had no legal control over other banks in New 
England ; yet in the matter of note issues it controlled all of 
them, since it had the power to discredit and ruin them. It 
forced them to redeem their notes on demand 

Example of the at the commercial center of New England. 

Suffolk Bank 

System. This necessity of daily redemption was the 

most powerful incentive to sound banking that 
could be devised or imagined. It had the effect of a daily 
bank examination where there was no chance of deception or 
escape. After the system had become firmly established and 
its virtues were made known to the world, the state of Massa- 
chusetts passed a law in aid of the Suffolk Bank system, 
forbidding banks to pay out any notes but their own. Thus 
the people were assured that all the currency in circulation 
should be at par with gold, and the banks were impelled to 
send home, for immediate redemption, the notes of other 
banks that they received in the course of business. The 
communities in which banks existed were continually purged 
of all bank notes except those with which they were perfectly 
familiar. This was almost an ideal condition, and would 
have been satisfactory, if there had been a common guaranty 
fund sufficient to protect the note holders against loss by 
1 Page 315. 

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bank failures. The strength of this system is shown by its 
history. In 1840 there were about three hundred banks 
in the New England States. In i860 the number had risen 
to 504. During this period of twenty years there were forty- 
seven bank failures and the estimated loss to note holders 
was $877,327. A tax of one-eighth of i per cent per annum 
on the average circulation outstanding would have covered 
this loss.^ The Suffolk Bank system was an evolution, not 
a creation, and in that fact its strength consisted. Its suc- 
cess assures us that a credit currency is entirely feasible, 
even in a country where independent banks of small capital 
abound. The prime condition of such a system is frequent 
redemption of notes at commercial centers and the restriction 
of the circulation, as much as possible, to the neighborhood 
of the issuing banks. 

The plan proposed by the Indianapolis Monetary Com- 
mission of 1898 for issuing a bank note currency which shall 

be both elastic and secure is entirely sound. 
ThfrindianapoUs j^ -^ straightforward and easily understood, 

and it presents the smallest deviation from 
existing practice that is consistent with the ends to be 
gained. Under that plan note holders have a prior lien on 
the assets of failed banks and on the shareholders' liability ; 
all banks are required to contribute to a common guaranty 
fund a sum equal to 5 per cent of their circulation for the 
redemption of the notes of failed banks, and to replenish the 
fund when needful in order to keep it up to that sum ; all 
national banks are required to receive the notes at par in 
payment of debts due to them, and the government is 
required to receive them at par for all dues to itself except 
duties on imports; the government cannot pay them to 
persons or corporations without the consent of the payees, 
but can compel their redemption on demand. 

1 L. Carroll Root, Sound Currency ^ Vol. VIII, No. 4, p. 231. 

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Branch banks are desirable as a means of distributing 

capital from the large cities to the rural communities and 

of equalizing the rates of interest, but they 

Branch Banking. -a o ^ j 

cannot attain ta the utility which they have 

achieved in other countries without the same freedom of 
note issue which is enjoyed there. Yet branch banking will 
find its way into our system in due time, whether the law 
allows national banks to have branches or not. Already 
large banks are acquiring the shares of smaller ones in 
order to control their deposits. The national bank act does 
not allow one bank to buy the shares of another, but it does 
not prevent the shareholders of one from buying shares in 
another^ sufficient to control the same ; and it does not pre- 
vent the bank from lending money on the shares so bought. 
The purchase of banks in this way is a marked feature of the 
financial movement of the present time. 

A central bank, like that of England, France, or Ger- 
many, would enable the business of the country to be car- 
ried on with a smaller cash reserve than is now required, and 
would thus be economical. If such a bank had grown up 
among us, it might be more serviceable than our present sys- 
tem, especially in the matter of note issues and in utilizing 
the surplus funds of the government, but its introduction now 

does not seem practicable. In the absence of 
Su^iiw""'^ such a bank the money of the government, 

over and above a fixed sum reserved as a 
working balance, should be deposited in banks of the reserve 
cities at the discretion of the Secretary of the Treasury, 
without special security, and should draw interest at the 
rate paid by such banks on the deposit balances of other 
banks. Under existing law the government has a prior 
lien on all the assets of failed banks for any dues to itself, 
which, under any judicious management of the Treasury, 
would be ample protection for such deposits. 

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The " money question " is the problem of organizing that 
currency system which will most effectively aid in the 
economic development of the country. The basis for any 
sound system must be that commodity standard — at pres- 
ent, gold — which combines with other essential qualities 
the greatest attainable stability. To secure the highest 
economy, convenience, and stability, however, credit must 
also be employed ; and to minimize the abuse of credit, 
the banks should be made responsible for an adequate note 
system. The monetary functions of the government should 
be restricted to maintaining the integrity of the coinage 
and, after the earliest possible withdrawal of the govern- 
ment notes, enforcing upon the banks those common rules 
— chief among them the redemption of notes at commercial 
centers — which insure safety. With the government thus 
freed from the need of considering questions of monetary 
policy and the responsibility of managing the credit cur- 
rency lodged with the credit-dealing institutions, subject 
to government supervision, our monetary system would 
approach closely the highest ideal of efficiency. 

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The so-called Inflation Bill of 1874 was vetoed by Presi- 
dent Grant on April 22 of that year. The veto was not 
merely the prevention of a bad measure; it compelled the 
adoption of a good one. In the political situation then 
existing it was impossible for the Republican party to stand 
still. It was compelled to pass the specie re§umption act. 
How the President was moved to veto the Inflation Bill was 
told by his Secretary of State, the Honorable Hamilton Fish, 
some years afterward, in a letter to Mr. George W. Childs 
of Philadelphia, which was published in the New York Eifen- 
ing Post of November 30, 1895. The essential parts of the 
letter are the following : 

New York, December 5, 1889. 

My dear Mr. Childs : . . . There are things connected with the 
famous veto of April, 1874, which have not yet been made public — 
interviews and consultations with his cabinet, and with members of 
his cabinet separately, with Senators and members of Congress — 
not all of whom favored the bill. I have a very distinct recollec- 
tion, confirmed by entries in a journal which I then kept, of many 
such consultations, of the influences which sought to induce him to 
sign the bill, of my own frequent conversations with him, of his 
frequentiy sending for me to talk on the subject, and, finally, his 
announcement to me, in confidence, of his decision to return the 
bill without his approval, and his saying that he supposed that all of 
his cabinet, except Mr. Cresswell and me, would object to his action. 
He was right ! 


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The question which was agitated in September, 1873, was not 
over the bill that was vetoed. It involved the general question of 
inflation. The Congress which passed the bill was not organized 
until December, 1873. 

I remember his return to Washington in September, 1873, dis- 
turbed about inflation, hesitating as to his own course. While the 
bill was pending I had frequent conversations with him. On the 
Friday before the veto (April 17) committees from Boston and New 
York visited the President, urging a veto of the bill. In cabinet 
meeting, the same day, the bill was discussed, both in favor and in 
opposition. On Saturday evening, at the President's request, I 
passed some hours with him considering the bill. He admitted the 
force of the objections which I endeavored to present, but he dwelt 
upon the influential friends who urged its approval, and at a late 
hour I left him determined to sign the bill, but to state his objec- 
tions to some of its features. On Monday evening I received a 
message requesting me to call upon him. He then told me that he 
had spent the most of the day (Sunday) writing a message, giving 
the best reasons that he could find, or had heard, for approving the 
bill, but that the more he wrote and the more he thought, he was 
the more convinced that the bill should not become a law, and that 
he was then writing another message, refusing his assent to the 
bill. He showed me a pile of manuscript which he had written to 
send with his signature to the bill, but which he had laid aside. 
He had then written many pages of the message vetoing the bill. 
He desired me to say nothing of his intention to withhold approval. 

On Tuesday (April 21), in cabinet meeting, he stated the con- 
clusion which he had reached. A majority of the cabinet was 
decidedly in opposition. One was hesitating. Mr. Cresswell and 
I warmly approved. Cresswell was so surprised and delighted that 
he applauded, and exclaimed, " You are right ! " 

Thus says my journal, in which are further notes of the discus- 
sion, and of remarks by various members. Among them was a 
cunning suggestion by one member " that it was wise to lay a paper 
aside after writing it, and to think it over." But the thing was then 
settled. The hour was late, and the President, with that humor 
which he so often displayed, said : "Yes, I will think it over, and 

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have it copied.'* He convened a special meeting of the cabinet for 
the next day (Wednesday), when he read over his revised draft 
Some sHght alterations were made. It was prepared for signature, 
and was signed, laus deo ! None of this has ever been given by 
me to the public. The most of it is taken from my journal made 
at the time, and I request that you hold it, at least as to its details, 
as confidential during my lifetime. 

I was an earnest, indefatigable, unswerving supporter and 
advocate of a veto, from the first to the last, and (I think) not 
a wholly ineffective agent in overcoming the specious political and 
interested arguments on the other side. My position enabled me 
to see and to know who were at work. The General's confi- 
dence enabled me to know, from day to day, what they were saying 
and doing. What I recorded at the time was recorded as accu- 
rately as I was capable of doing. Many of those in opposition 
were among my best and warmest friends. I was told by several 
of them that I would be held responsible for a most unpopular act 
of the administration. Fifteen years have passed. I have no 
reason to regret my course, nor have I, or the veto, been visited 
with much public indignation. The veto vindicated itself. . . . 
Very sincerely and truly yours, 

Hamilton Fish. 
Geo. W. Childs, Esq., Philadelphia. 

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The Indianapolis Monetary Commission was the outcome 
of a movement among the commercial organizations of the 
country following the national election of 1896, to promote 
legislation for the betterment of the currency. A convention 
of delegates of those bodies was held at Indianapolis on Jan- 
uary 12, 1897, which appointed an executive committee, of 
which Mr. H. H. Hanna of Indianapolis was chairman, to 
take steps to carry out the purposes of the convention. In 
pursuance of this design a commission of eleven persons, of 
which the Honorable George F. Edmunds was chairman, was 
designated to report a plan of currency reform. The prelimi- 
nary report of the commission, accompanied by a bill, was 
made public on January 3, 1898. The convention was reas- 
sembled on January 25. It adopted the plan proposed by the 
commission and recommended the passage of the bill by Con- 
gress. The bill was not passed, but the Indianapolis move- 
ment spurred Congress to take steps which resulted in the act 
of March 14, 1900. The Final Report of the Indianapolis 
Monetary Commission, a volume of 608 pages, prepared 
under the direction of Professor J. Laurence Laughlin, is a 
work of the highest merit and would be worth all that the 
Indianapolis movement cost, even if it should have no other 
result. The portion of the commission's bill relating to the 
national bank currency is embraced in the following sections 


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amendatory of the national bank act. Provisions of the 
existing law not amended or repealed are parts of the com- 
mission's plan, which accordingly contemplates that each 
national bank shall receive at par, in payment of debts due 
to it, the notes of other national banks, and that such notes 
shall be receivable at par for all dues to the United States 
except duties on imports : 

Sec. 1 8. That any national banking association organized under 
the laws of the United States shall, if its capital be wholly paid up 
and unimpaired, be entitled to receive from the Comptroller of the 
Currency circulating notes of denominations hereinafter provided, 
in blank, registered and countersigned as provided by law, to an 
amount not exceeding the amount of such paid up and unimpaired 
capital, after deducting therefrom its investment in real estate: 
Provided^ That during the five years first succeeding the passage 
of this act, any national banking association receiving from the 
Comptroller of the Currency circulating notes in blank under the 
provisions of this act shall maintain, on deposit with the Treasurer 
of the United States, bonds of the United States to an amount, at 
a valuation computed as hereinafter prescribed, equal to that of 
the circulating notes so received, whenever such notes shall not 
exceed 25 per centum of the capital stock. And for each succeed- 
ing year after the expiration of five years from the passage of this 
act, the amount of bonds required to be deposited before issuing 
notes in excess of such deposit shall be decreased by 20 per centum 
of the original 25 per centum of capital stock hereinbefore speci- 
fied, and from and after the expiration of ten years from the pas- 
sage of this act no such bond deposit shall be required. And no 
further deposit of bonds shall be required than is herein prescribed ; 
and any national banking association having at any time bonds of 
the United States deposited with the Treasurer in excess of the 
amount required by law to be at such time deposited may with- 
draw the whole or any part of such excess. But nothing herein 
contained shall be construed to authorize or permit the withdrawal 
of bonds required to be deposited under the provision of section 5153 
of the Revised Statutes of the United States, as security for the safe 

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keeping and prompt payment of public moneys deposited with any 
national banking association. 

Sec. 19. That so much of the provisions of section 5159 of the 
Revised Statutes of the United States and section 4 of the Act of 
June 2oth, 1874, and section 8 of the Act of July 12th, 1882, as 
provide that before any national banking association shall be 
authorized to commence banking business it shall transfer and 
deliver to the Treasurer of the United States, United States regis- 
tered bonds, to an amount, where the capital is $150,000 or less, 
not less than one-fourth of its capital stock, and $50,000 where 
the capital is in excess of $150,000, be and the same is hereby 

Sec. 20. That every national banking association shall at all 
times keep and have on deposit with the Division of Issue and 
Redemption for the purpose hereinafter specified a sum in gold coin 
equal to five per centum of its outstanding circulation. The amounts 
so kept on deposit shall constitute a fimd to be known as " The Bank 
Note Guaranty Fund," which fund shall be held for the following 
purpose, and for no other, namely : — 

Whenever the Comptroller of the Currency shall have become 
satisfied by the protest or the waiver and admission specified in 
section 5226, or by the report provided for in section 5227 of the 
Revised Statutes of the United States, that any association has 
refused to pay its circulating notes on demand in lawful money, he 
shall direct the redemption of such notes from the Bank Note 
Guaranty Fund aforesaid, and such notes shall thereupon be so 
redeemed. After the failure of any national banking association 
to redeem its notes shall have been thus ascertained, the bonds 
deposited with the Treasurer of the United States shall be sold, as 
provided by law, and the proceeds of such sale shall be paid into 
the Bank Note Guaranty Fund. The Comptroller of the Currency 
shall forthwith collect, for the benefit of said fund from the assets 
of the bank and from the stockholders thereof, according to their 
liability, as declared by this act, such sum as, with the bank's bal- 
ance in the Bank Note Guaranty Fund, shall equal the amount 
of its circulating notes outstanding. And for this purpose the 
United States shall, on behalf of the Bank Note Guaranty Fund, 

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have a paramount lien upon all the assets of the association ; and 
such fund shall be made good out of. such assets in preference to 
any and all other claims whatsoever, except the necessary costs and 
expenses of administering the same. 

Sec. 21. That whenever the Comptroller of the Currency shall 
ascertain what deficiency, if any, exists between the aggregate col- 
lections for the benefit of the Bank Note Guaranty Fund in the 
case of any failed bank and the amount of its outstanding notes 
redeemed and to be redeemed from the said fund, he shall assess 
such deficiency upon all the national banks in proportion to their 
notes outstanding at the time of the failure of such bank. 

Sec. 22. That every bank going into liquidation, voluntary or 
involuntary, shall, prior td the payment of its creditors other than 
noteholders and the distribution of any of its assets to its share- 
holders, deposit with the Assistant Treasurer in charge of the 
Division of Issue and Redemption lawful money to the full amount 
of its outstanding notes, and shall, in addition, pay to the aforesaid 
Assistant Treasurer such assessment for the benefit of the Bank 
Note Guaranty Fund as the Comptroller shall judge to be requisite 
to meet such bank's liability for the reimbursement of jthe guaranty 
fund for any deficiency resulting from the payment therefrom of the 
notes of banks which shall have failed prior to the date when such 
bank shall go into liquidation. 

Sec. 23. That the Secretary of the Treasury be and is hereby 
authorized, in his discretion, to cause to be invested in bonds of the 
United States any portion of the guaranty fund hereinbefore pro- 
vided for ; and such bonds shall be held and disposed of for the 
benefit of such fund. 

Sec. 24. That all interest accruing from the investment of any 
portion of the aforesaid guaranty fund, and all funds received in 
payment of the duties on circulation provided for in this act shall 
be held in the Division of Issue and Redemption in gold coin or in 
United States bonds, in the discretion of the Secretary of the Treas- 
ury, and shall be a fund supplementary and in addition to the guar- 
anty fund, to be used only in case said guaranty fund shall ever 
become insufiicient to redeem any bank notes issued under the 
provisions of this act, and it shall not be taken into account in 

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estimating the amount of assessments necessary to replenish said 
guaranty fund or in repayment to banks of their contributions to the 
guaranty fund. 

Sec. 25. That every national banking association shall pay, on 
or before the last day of every month, to the Division of Issue and 
Redemption, a duty imposed at the rate of two per centum per 
annum upon the average daily amount of its circulating notes out- 
standing in excess of 60 per centum of its capital stock, and not in 
excess of 80 per centum of such capital stock, and a duty imposed 
at the rate of six per centum per annum upon the average daily 
amount of such notes outstanding in excess of 80 per centum of 
its capital stock. Circulating notes of any national banking asso- 
ciation shall be deemed and held to be outstanding whenever they 
shall have been supplied by the Comptroller of the Currency to 
such association, in blank, registered and countersigned according 
to law, and shall have not been returned to the Comptroller for 
cancellation or covered by an equal amount of lawful money 
deposited with the Assistant Treasurer in charge of the Division 
of Issue and Redemption for the retirement of such notes. 

Sec. 26.^ That in order to enable the said Assistant Treasurer 
to assess the duties imposed by the preceding section, the Comp- 
troller of the Currency shall, within five days from the first day of 
each calendar month, make a return to the said Assistant Treas- 
urer of the United States, in such form as he. may prescribe, of the 
average daily amount of circulating notes of each national banking 
association outstanding during the calendar month next preceding. 
And every national banking association shall be notified by said 
Assistant Treasurer of the United States within ten days from the 
first day of each calendar month of the amount of the duties upon 
its circulating notes due from it to the United States, under this 
Act, and every such association shall, before the last day of such 
calendar month, pay to the Division of Issue and Redemption in 
lawful money the full amount of such tax ; and whenever any asso- 
ciation fails to pay the duties imposed by this act, the sums due 
may be collected in the manner provided for the collection of taxes, 
or said Assistant Treasurer may reserve the amount so due out of 
the interest as it may become due on any bonds deposited with him 

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by such defaulting association ; and while such default continues 
no further amount of circulating notes shall be issued to such 
defaulting associations. 

Sec. 27. That every national banking association shall pay to 
the Division of Issue and Redemption^ each half year, in the 
months of January and July, on or before the thirtieth day thereof, 
a duty of one-eighth of i per centum upon the value of its fran- 
chise as measured by the aggregate amount of its capital, surplus, 
and undivided profits, upon the last day of the calendar month next 
preceding. Sections 5214, 5215, and 5216 and 5217 of the Revised 
Statutes of the United States are hereby repealed. But nothing 
in this section contained shall be so construed as in any manner to 
release any national banking association from any liability for taxes 
or penalties incurred prior to the passage of this Act. 

Sec. 28. That the valuation of the bonds required by this Act 
to be deposited by national banking associations with the Treas- 
urer of the United States shall be annually fixed, upon a basis of 
3 per centum interest, by the Secretary of the Treasury, for each 
series of the bonds of the United States then outstanding and bear- 
ing a rate of interest exceeding 3 per centum. And such bonds 
shall be received upon deposit by the Treasurer of the United 
States at the valuation thus fixed by the Secretary of the Treas- 
ury. Bonds of the United States payable at the option of the 
Government shall be received upon deposit, under the provision of 
this Act, at 95 per centum of their market value. Bonds of the 
United States payable at a date named and bearing interest at a 
rate not exceeding 3 per centum per annum shall be received on 
deposit at their par. 

Sec. 29. That the circulating notes furnished to national bank- 
ing associations under the provisions of this act shall be of the 
denominations prescribed by existing law, except that no national 
banking association shall, after the passage of this Act, be entitled 
to receive or to issue or reissue or place in circulation any cir- 
culating notes of a less denomination than ten dollars. So much 

1 It was intended by the commission that this tax should be*paid into 
the fiscal Department of the Treasury and not into the Division of Issue 
and Redemption. 

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of section 5172 of the Revised Statutes as reads: "Express 
upon their face that they are secured by United States bonds, 
deposited with the Treasurer of the United States, by the written 
or engraved signatures of the Treasurer and Register, and by 
the imprint of the seal of the Treasurer ; and shall also," is hereby 

Sec. 30. That no national banking association shall count or 
report any of its own notes as a part of its cash or cash assets. 

Sec. 31. That section 9 of the act of July 12th, 1882, entitled 
" An Act to enable national banking associations to extend their 
corporate existence and for other purposes," be and the same is 
hereby repealed. 

Sec. 32. That from and after the passage of this act the stock- 
holders of every national banking association shall be held indi- 
vidually responsible for all contracts, debts, and engagements of 
such association, each to the amount of his stock therein, at the 
par value thereof in addition to the amount invested in such stock. 
The stockholders in any national banking association who shall 
have transferred their shares, or registered the transfer thereof, 
within sixty days next before the date of the failure of such asso- 
ciation to meet its obligations, shall be liable to the same extent 
as if they had made no such transfer ; but this provision shall not 
be construed to affect in any way any recourse which such share- 
holders might otherwise have against those in whose names such 
shares are registered at the time of such failure. 

Sec. 33. That the fund of 5 per centum of outstanding circu- 
lating notes required to be kept on deposit by every national bank- 
ing association for the redemption of the circulating notes of such 
association shall be in gold coin of the United States, and the 
Comptroller of the Currency shall, with the approval of the Secre- 
tary of the Treasury, have authority to provide for the redemption 
of national bank notes at any or all of the sub-treasuries of the 
United States. 

Sec. 34. That so much of section 3 of the act of June 20th, 
1874, entitled *' An Act fixing the amount of United States notes, 
providing for a redistribution of the national bank currency, and 
for other purposes," as reads, ** And when the circulating notes of 

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any such associations, assorted or unassorted, shall be presented 
for redemption in sums of $1000, or any multiple thereof, to the 
Treasurer of the United States, the same shall be redeemed in 
United States notes," be amended to read, " And when the circu- 
lating notes of any such associations, assorted or unassorted, shall 
be presented for redemption in sums of $1000, or any multiple 
thereof, at the Treasury, or at such sub-treasuries as may be desig- 
nated by the Comptroller of the Currency, the same shall be 
redeemed in lawful money. But nothing in this Act contained 
shall be construed to impose upon 'the United States any liability 
for the redemption of the notes of any national banking associa- 
tion beyond the proper application of the redemption and guaranty 
funds deposited with the Division of Issue and Redemption, and 
the enforcement of the remedies by this act provided." 

Sec. 35. That at least one-fourth of the reserve of 25 per 
centum of the aggregate amount of its deposits required under 
the provisions of existing law to be held by every national banking 
association in either of the cities designated as reserve or central 
reserve cities, and at least one-fourth of the reserve of 15 per 
centum of the aggregate amount of its deposits required to be held 
by every other association shall consist of coin of the United States 
actually held in the vaults of such bank : Provided^ That nothing 
in this section except as expressly provided shall be construed to 
alter or in any way affect the provisions of existing law governing 
the maintenance of reserves. 

Sec. 36. That so much of section 3 of the Act of June 20th, 
1874, entitled "An act fixing the amount of United States notes, 
providing for a redistribution of the national bank currency, and 
for other purposes," as provides that the fund deposited by any 
national banking association with the Treasurer of the United 
States for the redemption of its notes shall be counted as a part 
of its lawful reserve as provided in section 2 of the Act aforesaid 
be, and the same is hereby repealed. And from and after the 
passage of this Act neither such fund of 5 per cent, nor any 
contribution to the Bank Note Guaranty Fund, provided for in 
section 20 of this Act, shall be counted by any national banking 
association as a part of its lawful reserve. 

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Sec. 37. That section 5138 of the Revised Statutes of the 
United States be amended to read as follows : " No association 
shall be organized under this title in a city the population of which 
exceeds fifty thousand inhabitants with a less capital than $200,000. 
No association shall be organized with a less capital than $100,000, 
except that banks with a capital of not less than $50,000 may, with 
the approval of the Secretary of the Treasury, be organized in any 
place the population of which does not exceed six thousand inhab- 
itants, and that banks with a capital of not less than $25,000 may, 
with the approval of the Secretary of the Treasury, be organized 
in any place the population of which does not exceed four thousand 

Sec. 38. That it shall be lawful for any national banking asso- 
ciation to establish branches under such rules and regulations as 
may be prescribed by the Comptroller of the Currency, with the 
approval of the Secretary of the Treasury. 

Sec. 39. That so much of section 5182 of the Revised Statutes 
of the United States as provides that the circulating notes of 
national banking associations shall be received at par for all sala- 
ries and other debts and demands owing by the United States to 
individuals, corporations, and associations within the United States, 
except interest on the public debt and in redemption of the national 
currency, be and the same is hereby repealed. 

Sec. 40. That section 324 of the Revised Statutes of the United 
States be amended so as to read as follows : " There shall be in the 
Department of the Treasury a Bureau charged, except as in this act 
otherwise provided, with the execution of all laws passed by Con- 
gress relating to the issue and regulation of currency issued by 
national banking associations, the chief officer of which Bureau shall 
be called the Comptroller of the Currency, and shall perform his 
duties under the general direction of the Secretary of the Treasury." 

Sec. 41. That the examination of the affairs of every national 
banking association authorized by existing laws shall take place 
at least twice in each calendar year, and as much oftener as the 
Comptroller of the Currency shall consider necessary in order to 
furnish a full and complete knowledge of its condition ; and the 
person making such examination shall have power to call together 

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a quorum of the directors of such association, who shall, under 
oath, state to such examiner the character and circumstances of 
such of its loans or discounts as he may designate ; and from and 
after the passage of this Act all bank examiners shall receive fixed 
salaries, the amount whereof shall be determined by the Secretary 
of the Treasury. But the expense of the examinations herein pro- 
vided for shall be assessed by the Comptroller of the Currency 
upon the associations examined. The Comptroller of the Cur- 
rency shall so arrange the duties of national bank examiners that 
no two successive examinations of any association shall be made 
by the same examiner. 

Sec. 42. That no association shall hereafter make any loan or 
grant any gratuity to any examiner of such association. Any asso- 
ciation offending against this provision shall be deemed guilty of a 
misdemeanor, and shall be fined not more than $1,000 and a fur- 
ther sum equal to the money so loaned or gratuity so given ; and 
the officer or officers of such association making such loan or grant- 
ing such gratuity shall be likewise deemed guilty of a misdemeanor, 
and shall be fined not to exceed $500. And any examiner accept- 
ing a loan or gratuity from any association examined by him shall 
be deemed guilty of a misdemeanor, and shall be fined not more 
than $500, and a further sum equal to the money so loaned or 
gratuity given. 

Sec. 43. That the Comptroller of the Currency, in addition to 
the reports provided for by existing laws, shall have authority to 
call for such other reports, regular or special, as he may deem 
advisable ; and such reports shall be rendered in such form as the 
Comptroller may prescribe ; and each association making such 
report shall cause a copy thereof to be conspicuously displayed in 
a public place in its banking house for the period of thirty days 
from the date of such report ; but nothing herein contained shall 
be construed to require the publication of such additional reports 
by each association in the manner prescribed for other reports now 

Sec. 44. That any national banking association heretofore 
organized may at any time within one year from the passage of 
this Act, and with the approval of the Comptroller of the Currency, 

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be granted, as herein provided, all the rights, and be subject to all 
the liabilities, of national banking associations organized here- 
under: Provided^ That such action on the part of such associa- 
tions shall be authorized by the consent in writing of shareholders 
owning not less than two-thirds of the capital stock of the associa- 
tion. Any national banking association now organized which shall 
not, within one year after the passage of this Act, become a national 
banking association under the provisions hereinbefore stated, and 
which shall not place in the hands of the Treasurer of the United 
States the sums hereinbefore provided, for the redemption and 
guaranty of its circulating notes, or which shall fail to comply 
with any other provision of this Act, shall be dissolved ; but such 
dissolution shall not take away or impair any remedy against such 
corporation, its stockholders, or officers, for any liability or penalty 
which shall have been previously incurred. 

Sec. 45. That any bank or banking association incorporated by 
special law of any state, or organized under the general laws of any 
state, and having a paid-up and unimpaired capital sufficient to 
entitle it to become a national banking association under the pro- 
visions of this act, may, by the consent in writing of the share- 
holders owning not less than two-thirds of the capital stock of such 
bank or banking association, and with the approval of the Comp- 
troller of the Currency, become a national bank under this system, 
under its former name or by any name approved by the Comp- 
troller. The directors thereof may continue to be the directors of 
the association so organized until others are elected or appointed in 
accordance with the provisions of the law. When the Comptroller 
of the Currency has given to such bank or banking association a 
certificate that the provisions of this Act have been complied with, 
such bank or banking association, and all its stockholders, officers, 
and employes, shall have the same powers and privileges, and shall 
be subject to the same duties, liabilities, and regulations, in all 
respects, as shall have been prescribed for associations originally 
organized as national banking associations under this Act 

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A BILL "To Maintain the Gold Standard," etc., commonly 
called the Fowler bill, was reported from the House Commit- 
tee on Banking and Currency on April 5, 1902. It abolishes 
the office of comptroller of the currency and substitutes in its 
place a Board of Control consisting of three members. The 
members first appointed are to hold office four, eight, and 
twelve years respectively, after which each member shall bs 
commissioned for twelve years, but the term of one member 
shall expire at the end of each four-year period. They are 
to discharge the duties which now devolve upon the comp- 
troller of the currency, and such other duties as may be 
imposed upon them by law. 

Section 2 provides that if any national bank shall assume 
the current redemption of an amount of United States notes 
equal to 20 per cent of its paid-up capital, it shall have the 
right, without depositing United States bonds as now provided 
by law : First, to immediately take out for issue, and circu- 
late, an amount of bank notes equal to 10 per cent of its 
paid-up capital, by paying a tax, on the first days of January 
and July of each year, of one-eighth of i per cent upon the 
average amount of such notes in actual circulation during 
the preceding six months ; second,' to take out for issue, and 
circulate, an amount of bank notes equal to i o per cent of its 
paid-up capital at any time after the expiration of one year 
from the date of the assumption aforesaid by paying a sim- 
ilar tax. At intervals of one year each the banks may take 


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out, issue, and circulate an additional lo per cent of notes 
at a tax of five-eighths of i per cent each half year until the 
whole amount of notes shall be equal to 60 per cent of their 
paid-up capital. After the expiration of six years from the 
beginning the banks may, with the approval of the Board of 
Control, take out, issue, and circulate an additional 20 per 
cent of notes by paying a tax thereon at the rate oi i^ per 
cent each half year. After the expiration of seven years from 
the beginning they may, with like approval, take out, issue, 
and circulate an additional 20 per cent of notes by paying a 
tax thereon at the rate of 2^ per cent each half year. 

In this way the banks are to assume the current redemp- 
tion of $130,000,000 of United States notes (greenbacks), 
— the quota of each bank to be designated by a stamp, — 
and the government is to redeem and cancel $65,000,000 
additional, leaving only $151,000,000 outstanding. After 
this has been accomplished, any national bank which has not 
assumed the current redemption of any United States notes 
as here provided may then take out an amount of circulation 
equal to 10 per cent of its capital, and from year to year 
thereafter additional amounts of circulation in accordance 
with the provisions of Section 2 by paying the rates of tax 
therein prescribed ; but no national bank shall pay out any 
United States notes except those whose current redemption 
has been assumed by national banks, and so distinguished 
by a stamp. All other United States notes received by the 
banks in the course of business must be presented by them 
to the Treasury and redeemed in gold and canceled. The 
Treasury is to maintain a gold reserve equal to $^i per cent 
of the United States notes o*itstanding. The Treasury is to 
discontinue the issue of gold certificates. The United States 
notes, whose current redemption is assumed by the banks, 
are to be redeemed eventually from taxes on bank note 
circulation and interest on government deposits in banks. 

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Each bank which takes out circulating notes must first 
deposit in the Treasury an amount of United States bonds, 
or gold coin, equal to 5 per cent thereof as a common guar- 
anty fund for the redemption of the notes of insolvent 
banks. This 5 per cent may be counted as a part of the 
legal reserve of the depositing bank, and the interest on the 
bonds shall be paid to said bank. The bank notes are to be 
a first lien on the assets of the issuing bank and are to be 
received at par by all national banks. The government is 
to receive them for all public dues except duties on imports 
and may pay them out again. Whenever the guaranty fund 
shall fall below 3 per cent of all the outstanding bank note 
circulation the Board of Control is to impose a tax on all the 
banks to replenish it, but this tax is not to exceed i per cent 
per annum on their outstanding circulation. 

The Board of Control is to divide the United States into 
clearing-house districts, and each clearing-house district is to 
have one clearing-house city for all the bank notes issued by 
the banks located in said district, and every bank which has 
taken out circulation is to belong to some particular district, 
and the notes so taken out must bear the number of the dis- 
trict to which the bank issuing them belongs ; but any bank 
may have an agency for the redemption of its notes in each 
of the clearing-house cities. The notes are to be redeemed 
on demand in gold coin at the home office of the bank issu- 
ing them, and if said bank is located outside of a clearing- 
house city it must select a national bank as its agent in the 
clearing-house city of the district to which it belongs, which 
shall redeem said notes in gold coin, or it may make said 
clearing house its agent for such redemption. If any bank 
shall receive in the course of business the notes of any other 
bank situated outside of its own district, it is not allowed to 
pay them out, unless the issuing bank has a redemption 
agency within that district, but is required to send them 

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home for redemption. Banks are allowed to have branches, 
but are required to have an agency for the redemption of 
their circulating notes in the clearing-house city of every 
clearing-house district where they have branches. 

The Secretary of the Treasury is to give gold coin in 
exchange for silver dollars when presented in sums of $ioo 
or any multiple thereof, and is to coin all the silver bullion 
now in the Treasury into subsidiary silver coins of suitable 

The measure, whose outlines are given above, would 
undoubtedly put our currency system on a sound basis and 
would do so without any disturbance to business. It is per- 
haps an objection that it seeks to accomplish its ends by 
cumbersome and circuitous, instead of plain and direct, 
methods. The assumption by the banks of the current 
redemption of $130,000,000 of greenbacks does not relieve 
the government of responsibility for them, but only of the 
temporary inconvenience of selling bonds to replenish its gold 
reserve in the eveat of another panic like that of 1893-95. 
It is open to question whether the government ought to be 
relieved of this responsibility, seeing that nations learn wis- 
dom best in the school of experience. However that may 
be, the bill takes a very roundabout process to secure the 
substitution of bank notes for greenbacks. It is so compli- 
cated that nobody could safely predict how it would work in 
practice. If each bank should avail itself of the privilege 
offered to it, there would be 4221 separate parcels of green- 
backs to be stamped with the name and promise of the 
particular banks charged with the responsibility of their tem- 
porary redemption. The plan of the Indianapolis Monetary 
Commission is much more simple and easy of execution, 
and is therefore to be preferred. 

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The following communication from an authoritative source, 
touching the advantages of the Canadian system of branch 
banks, is embraced in the report of the House Committee on 
Banking and Currency accompanying the Fowler bill : 


Montreal, March 26, 1902. 

My dear Sir : I am favored with a copy of the views of the 
Hon. Joseph H. Walker on " branch banks," and note your request 
for specific replies thereto. 

I can only write from the point of view of a Canadian banker, 
and I am not prepared to say offhand that criticism of mine on 
Mr. Walker's remarks applies to the condition of affairs in the 
United States or that the branch-bank system of banking would 
be successful there, although I confess I should dearly like to 
make the attempt. 

Mr. Walker says : ** The authorization of branch banks is 
exceedingly bad economics" and ** still worse statesmanship." 
Incidentally, he displays his preference for what he calls " local 
independent institutions," and he fails to find any justification 
for branch banks, apparently regarding the latter as a menace to 
the " free banking system" of the United States. He also doubts 
the wisdom of permitting powerful city banks to establish branches 
in places containing a population of only 4000 or less. The rea- 
sons advanced for his condemnation of a branch-bank system, 
which has been so eminently successful in Great Britain and the 


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Dominion of Canada, are apt to raise a doubt in the minds of 
those familiar with that system whether he intends them to be 
taken seriously or whether they are only given with a view to 
bringing out the views on the opposite side. However, his 
evident unfamiliarity with the subject must be a sufficient excuse 
for a brief memorandum on a few points. 

The Bank of Montreal has 50 branches established at all the 
principal points in the Dominion of Canada. The management 
of these branches is intrusted to officers who have been trained 
from boyhood in the service of this bank, and by the time they are 
ripe for the position of manager they should have acquired expe- 
rience, ability, and a degree of wisdom, which keeps them abso- 
lutely free from "political consideration," which Mr. Walker 
fears might influence their judgment in the conduct of the bank's 
business. I may say that, so far as I know, banking in Canada is 
entirely non-political, and no official of the bank is permitted to 
take active part in politics, though he is allowed absolute freedom 
in voting. The chief desire of the country bank manager is to 
make his branch a source of profit to the parent institution, and as 
a rule the size and resources of that parent institution enable him 
to render more financial aid, at a lower rate of interest^ to enter- 
prises such as Mr. Walker mentions, viz., " the street railway, the 
electric-light plants, the new factory, the new town hall, and better 
roads," than the small local banks, formed by the few public-spirited 
citizens, who are more likely to further their own individual enter- 
prises than those of the general community. 

Mr. Walker's fear that the customers of a country branch are in 
times of stringency sacrificed to the necessity of the parent insti- 
tution is also a phantom of his imagination, for the loans of a 
branch being less liquid, the knowledge of the difficulty of realiz- 
ing them and the small proportion they bear to the whole amount, 
leaves them practically undisturbed in the acutest panic, and their 
only knowledge of a stringency is imparted through the medium 
of newspaper articles. 

Equally fallacious is the statement that no " independent local 
bank " can exist in a town after the establishment in that town of 
a branch of a larger bank. Many Canadian instarices could be 

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cited to prove the contrary, and local banks exist and flourish in 
the Dominion as next-door neighbors to branches of the largest 
banks in Canada. 

It is difficult to treat seriously the reference made to the neces- 
sity of a choice between one bank with 10,000 branches and 
10,000 independent banks. There is no sign in Canada of the 
absorption by any one great bank of its rivals in business. The 
whole Dominion is dotted with branches of what Mr. Walker terms 
"city banks." These branches are established in agricultural, 
mining, ranching, and fishing districts, as well as the center of 
trade and manufacturing industries, and they all assist in accom- 
plishing the purpose which Mr. Walker states local independent 
banks are alone qualified to effect In fact, the branches of Cana- 
dian banks are doing the very work which he fears might be pre- 
vented were the same system introduced into the United States. 
They are putting within reach of those with no capital, but energy 
and enterprise, the capital of the wealthier classes. 

They economize capital. I quote from my annual address as 
president of the Canadian Bankers* Association : 

"A quarter of a century ago the paid-up capital stock of banks 
of Canada was $66,800,000. To-day it is $67,480,000, or practi- 
cally the same amount. In the interval the *rest,' or reserve profits, 
has risen by more than 50 per cent, and now stands at $36,900,000. 
We have therefore been able to conduct an immensely increased 
domestic and foreign trade upon a stationary bank capital stock, 
a result due to the excellence of our banking system, and affording 
crowning evidence of the adaptability of that system to the require- 
ments of a young and growing country." 

They equalize the rate of interest, and the establishment of a 
branch bank in a country town means that the borrower obtains 
his loans at a rate not much above the city borrower. In out- 
lying districts, owing to difficulties of transport, increased cost 
of living, inferior security, there is sometimes a difference of i or 
2 per cent. 

There can be no doubt, also, that to the depositor — a class that 
the Government aims to protect — the security of a bank with the 
large capitalization necessary to do the branch-bank business is 

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much greater than the local bank with a petty capital of $25,000 
or $50,000. 

At the head office, with larger experience, and freed from local 
influences and atmosphere, the executive is often better able to 
judge of the desirability of lending to a proposed local enterprise, 
and, I do not hesitate to say, has frequently been the means of 
preventing serious losses to the small community by timely advice 
and warning. 

E. S. Clouston, 
General Manager and President 

Canadian Bankers* Association. 
Chas. N. Fowler, Esq., 

Chairman Committee on Banking and Currency ^ 

House of Representative s^ United States ^ Washington^ D,C, 

Subjoined is a statement of the condition of the chartered 
banks of Canada, December 31, 1901 : 

Capital paid up . . 

Surplus fund . . 

Circulating notes . 

Due to Dominion 
and provincial 
governments . 

Deposits . . . 

Due to other banks 

Undivided profits 

All other . . . 

Liabilities Resources 

«S567,59T,3ii Specie I^ii,57i.337 

37,364,708 Dominion notes . . , 21,405,397 
54,372,788 Bank note guaranty 

fund .... 2,568,918 

Checks on other 

7,686,734 banks 16,993,896 

367,095,525 Due from other 

9,700,218 banks 24,901,158 

8,029,861 Government securi- 

10,236,648 ties 9,768,701 

Other public securi- 
ties 14,528,036 

Railway and other 

securities . . . 31.994,130 
Loans and discounts 404,235,125 
Loans to govern- 
ments .... 3,793*626 
Another .... 20,317,469 
^562,077,793 $562,077,793 

digitized by Google 



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first issues of, 103; prohibited 
by Parliament, 105; Rhode 
Island issues, 105; pretexts for, 
107; "new tenor," 108; depre- 
ciation of, 1 10 ; economic effects 
of, 1 1 1 ; revolutionary, 1 1 5-1 29 ; 
Washington's first views of, 1 19 ; 
later opinions of , 120 ; final cata- 
clysm of, 121 ; depreciation of, 
125 ; " continental money," 1 26 ; 
post-revolutionary, 1 28. 

Bills of exchange, 232. 

Bills of lading, 233. 

"Black Friday," 152. 

Bland, R. P., 193. 

Bonds of the United States, 134, 
141, 175, 206, 208, 210, 234. 

Bond syndicate of 1895, 208. 

Boutwell, George S., 36, 177. 

Branch banks, 296, 358, 370, 395, 

399» 409- 
Brussels monetary conference, 96. 
Bubble Act of Parliament, 265. 

California, private gold coinage of, 
8, 9; first gold discovered in, 
50; present production of, 54; 
adheres to gold standard, 1 53 ; 
specific contract law in, 1 56. 

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Canada, free banking in, 344. 
Canadian bank system, 397-401. 
Carlisle, John G., 20ij 205- 

Cash credits, 232, 394. 
Certified checks, 237. 
Chaos of banking in the XIX 

century, 346-356. 
Chase, Salmon P., 131-143, 146, 

158, i59» 372. 
Cheves, Langdon, 298. 
Clay, Henry, 285, 287, 307, 


Clearing house, 240-255; opera- 
tion in New York, 241-247 ; a 
proof sheet of, 244; magnitude 
of, 246 ; other varieties of, 247 ; 
loan certificates, 248-253. 

Cleveland, Grover, as President, 
calls Congress in extra session, 
204 ; Venezuela message of, 

Coinage, 16-29; coins of Massa- 
chusetts, 26 ; first United States 
coinage act, 32; second, 34; 
third, 36 ; fourth, 37 ; subsidiary 
coins, 16. 

CoUamer, Jacob, 136. 

Colonial, bills of credit, 1 03-1 13; 
banking, 256-267. 

Colorado, gold production of, 52, 

Commercial crises, 202. 
Commodity, money is a, i. 
Comstock lode, 50, 51. 
Confederate currency, 164-173. 
Counterfeit notes, 352 ; detectors, 

"Crime of 1873," 192. 
"Currency principle" of note 

issues, 322. 

Deficit in the Treasury, 185, 205, 

Deposits, 219; interest on, 237; 

certificates of, 237 ; public, 293 ; 

payable in specie, 293 ; removed 

from Bank of the United States, 

Discount of commercial paper, 

219, 230. 
Duane, William J., 311". 


Elasticity of note issues, 340. 
England, adopts the gold standard, 

63 ; Bank of, 385-393. 
Erlanger loan, 167. 
Examiners of national banks, 382. 

Fessenden, William Pitt, 136, 143. 
Foreign banking systems, 385- 

416: English, 385-393 ; Scotch, 

394-397; Canadian, 397-401; 

French, 401-406 ; German, 406- 

Forman, Joshua, 329. 
Foster, Charles, 200. 
Fractional currency, 140. 
France, adopts the gold standard, 

78-87 ; Bank of, 401-406. 
Free bank system, 335-345? 

adopted in New York in 1838, 

337; in Illinois in 1851, 340; 

in Indiana in 1852, 342 ; in Wis- 

consm in 1853, 343? ^^ Canada 

in 1850, 344. 


Gallatin, Albert, 283-289. 
Gallatin, James, 133. 

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4; I 

Geor^a, banking disorders in, 
349 ; Georgia-Chicago banks, 


Germany, adopts the gold standard, 
65; Imperial Bank of, 406-410. 

Gold, not wholly free from varia- 
tions of value, 1 2 ; bullion, 20 ; 
private coins, 22 ; mint price of, 
23; as a metal, 41-48; its 
affinity for quicksilver, 42 ; 
placer, 42 ; hydraulic mining of, 
44; quartz crushing, 45 ; chlori- 
nation, 46 ; cyanide process, 46 ; 
production, 49-59; effect on 
prices, 55 ; standard, 60-77 J 
adopted by England, 63 ; by the 
United States, 64; by Germany, 
65 ; by Austria-Hungary, 69 ; 
by India, 72; by Japan, 72; by 
Russia, 74; by France and the 
Latin Union, 78-87; anti-gold 
law, 143; gold exchange bank, 
150; clearings, 156; gambling, 
151 ; contracts enforceable not- 
withstanding legal-tender act, 
157; imports in 1879 and 1880, 

181 ; reserve of ;J{ 100,000,000, 

182 ; exports, 185, 200, 207, 210 ; 
the Gold Standard Act of 1900, 
185; certificates, 188. 

Grant, U. S., as President, vetoes 

the Inflation Bill, 177. 
Greenbacks, 134. 
Gresham*s Law, 25. 

Hayes, R. B., elected governor of 
Ohio in 1875, ^^o ; President of 
the United States, 180; vetoes 
Bland silver bill, 194. 

Hepburn clase in the Supreme 
Court, 158. 


Illinois, free banks of, 340. 
India, adopts the gold standard, 

72; stops coining silver, 202. 
Indiana, free banks of, 342 ; State 

Bank of, 357-362. 
Inflation Bill, 177 ; inflationists, 

Ingham, Samuel, 300, 301, 305, 

Jackson, Andrew, President in 
1829, 300 ; makes attack on 
Bank of the United States, 302 ; 
desists from it, 307 ; renews it, 
310; vetoes charter, 310; is re- 
elected President, 311 j removes 
public deposits, 311. 

Japan adopts the gold standard, 

Jefferson, Thomas, opposes char- 
ter of the first Bank of the United 
States, 280, 284. 

Jevons, W. Stanley, 390. 

JuUiard vs. Greenman in the Su- 
preme Court, 159. 

Hamilton, Alexander, report on 
the mint, 31 ; views on banking, 
220 ; on the Bank of New York, 
272 ; on first Bank of the United 
States, 278, 280, 281. 

Kelley, W. D. 193. 
Kendall, Amos, 301, 310. 
Klondike, gold production of, 52. 
Knox, John J., 36, Zl' 

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Land banking, 258. 

Latin Monetary Union, 75-87. 

Legal tender, 30-40; origin of, 
30; significance of, 31; law of 
United States in 1792, 31; in 
1834, 34; in 1873, 36; present 
varieties of, .38 ; act of 1862, 
134; ^150,000,000 notes (green- 
backs) authorized, 134; $iSOr 
000,000 additional authorized, 
137; ;J{ 1 00,000,000 additional 
authorized, 1 39 ; interest-bearing 
notes, 139; compound-interest 
notes, 140; effect of, on wages, 
147 ; on prices of commodities, 
148; legal- tender cases in the 
Supreme Court, 158. 

Letters of credit, 233. 

Liability of shareholders, 359, 376. 

Loans and discounts, 230. 

" Locofocos," 335. 

Louisiana Bank Act of 1842, 367. 

McCulloch, Hugh, 176, 359, 360, 


McKinley, William, 184. 

Macleod, H. D., 390. 

Madison, James, 292. 

Mann, Abijah, 336. 

Manning, Daniel, 197. 

Massachusetts, Bank of, 271; gen- 
eral banking law of, 324; pri- 
vate note issues in, 261; Land 
Bank Scheme in, 262-266. " 

Memminger, C. G., 164-169. 

Michigan, "wild-cat banks" in, 

Mint price of gold, 23. 

Monetary conference, interna- 
tional, 88-102 : at Paris, 1878, 
88; at Paris, 1881, 91; at Brus- 
sels, 1892, 96. 

Money of account, 28. 

Morris, Robert, 268, 269. 

Mortgage loans, 362, 375. 

National bank system, 372-384; 
origin of, 372 ; organization of, 
373; circulating notes, 376; re- 
demption of, 377 ; tax on, 378 ; 
legal reserve, 379; restrictions, 
380; examiners, 381; deposito- 
ries of public money, 382 ; con- 
dition on September 30, 1901, 


New England colonies, early cur- 
rency of, 6-7 ; colonial banking 
experiments in, 256-267; states, 
chaos of banking in, 317. 

New London Society for Trade 
and Commerce, 260. 

New Netherland, first local cur- 
rency of, 7. 

New York, Bank of, 272. 

North America, Bank of, 268. 

North Carolina, chaos of banking 
in, 348. 

Note holders* prior lien on bank 
assets, 324, 330, 396, 398. 

Ohio, State Bank of, 367. 
Origin of money, 2. 

Panic of 1893, 202. 
Paper currency, denominations of, 

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Paris Monetary Conference, 88, 91. 

Pennsylvania legislature repeals 
charter of Bank of North Am- 
erica, 270; reenacts it, 271. 

Pine-tree shilling, 26. 

Post notes, 295. 

Proclamation of Queen Anne, 27. 

Randolph, Edmund, 280. 
Receivers of national banks, 381. 
Reports of national banks, 381. 
Reserves, banking, 221, 235 ; Treas- 
ury, 209. 
Rhode Island, 105, 261. 
Russia adopts the gold standard, 74. 


Safety fund system, 327-334; 
adopted in New York in 1829, 
329; in Canada in 1890, 332. 

Scotch bank system, 394-397. 

Seigniorage, 19, 205. 

Sherman, John, Senator, 178; 
Secretary of the Treasury, 180 ; 
silver act, 183. 

Silver dollar, 16; in panic of 1893, 
191-216; Bland Act, 193; Alli- 
son amendment, 194 ; vetoed by 
President Hayes and repassed, 
194; silver certificates, 195, 198; 
operation of Bland Act, 196; 
disturbance in 1884, ^97; Sher- 
man Act of 1890, 199 ; panic of 
1893, 204 ; end of silver purchas- 
ing, 204 ; coinage of bullion pur- 
chased under the Sherman Act, 
211; total coinage under all acts, 
212; proposed redemption of, 

Smith, George, 362-366. 

South Africa, gold production of. 

South Carolina, rice currency in, 


Spanish dollar, 25. 
Spaulding, E. G., 132, 133. 
Specie payments^ suspensions of, 


Specie reserve, in Massachusetts, 
323; in Louisiana, 367. 

Specie resumption act, 178; im- 
successful attempt to repeal, 179; 
carried into effect, 180. 

Specific Contract Law in Cali- 
fornia, 156. 

Speculation in bank charters, 346. 

Standard of value, 1 8. 

Stevens, Thaddeus, 137. 

Stock notes, 315. 

Subsidiary coins, 16. 

Suffolk Bank system, 315-326. 

Supreme Court decisions, 157. 

Surplus of banks, 238. 

Tennessee and Kentucky, skin 
currency in, 8. 

Tobacco currency, 3-5. 

Token coins, 16. 

Trade is barter even when money 
is employed, 10 ; trade dollar, 37. 

Treasury Department, divisions of 
issue and redemption in, 186. 

Treasury notes, in the War of 181 2, 
130; in the financial crisis of 
1837, 130; in the war with 
Mexico, 131 ; of the Confederate 
States, 165-169; of 1890, 183; 
to be retired, 187. 

Treasury reserve, 209. 

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Value, standard of, i8. 
Venezuela message of President 

Cleveland, 210. 
Virginia, tobacco money in, 3-5. 


Wampum, 2, 3, 7. 

War financiering, 146. 

Washington, George, views on 
bills of credit, 119, 120; action 
on first Bank of the United 
States, 280. 

Webster, Daniel, 217, 291, 2Q4«\i^ji 

310. ^^ 

Webster, Pelatiah, 116, 121. 
Wheat harvest of 1891, 200. 
"Wild-cat banks," 351. 
Wisconsin, free banks o^ 343; 

Marine and Fire Insurance Co., 

Witwatersrand, gold prodaction 

of, 51. 
Wolcott Commission, loa 
Woodbury, Levi, 300. 

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. . SEP . 1,3 lao 

JAN 19 1946 

APR 15 1946 


MAR Q 6 mp 


LD 21-20n.-6,'32 

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